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Accelerating urban intelligence: People, business and the cities of tomorro...
About the research
Accelerating urban intelligence: People, business and the cities of tomorrow is an Economist Intelligence Unit report, sponsored by Nutanix. It explores expectations of citizens and businesses for smart-city development in some of the world’s major urban centres. The analysis is based on two parallel surveys conducted in 19 cities: one of 6,746 residents and another of 969 business executives. The cities included are Amsterdam, Copenhagen, Dubai, Frankfurt, Hong Kong, Johannesburg, London, Los Angeles, Mumbai, New York, Paris, Riyadh, San Francisco, São Paulo, Singapore, Stockholm, Sydney, Tokyo and Zurich.
Respondents to the citizen survey were evenly balanced by age (roughly one-third in each of the 18-38, 39-54 and 55 years and older age groups) and gender. A majority (56%) had household incomes above the median level in their city, with 44% below it. Respondents to the business survey were mainly senior executives (65% at C-suite or director level) working in a range of different functions. They work in large, midsize and small firms in over a dozen industries. See the report appendix for full survey results and demographics.
Additional insights were obtained from indepth interviews with city officials, smart-city experts at NGOs and other institutions, and business executives. We would like to thank the following individuals for their time and insights.
Pascual Berrone, academic co-director, Cities in Motion, and professor, strategic management, IESE Business School (Barcelona) Lawrence Boya, director, Smart City Programme, city of Johannesburg Amanda Daflos, chief innovation officer, city of Los Angeles Linda Gerull, chief information officer, city of San Francisco Praveen Pardeshi, municipal commissioner, Brihanmumbai Municipal Corporation (Mumbai) • Brian Roberts, policy analyst, city of San Francisco Sameer Sharma, global general manager, Internet of Things (IoT), Intel • Marius Sylvestersen, programme director, Copenhagen Solutions Lab Tan Kok Yam, deputy secretary of the Smart Nation and Digital Government, Prime Minister’s Office, SingaporeThe report was written by Denis McCauley and edited by Michael Gold.
Talent for innovation
Talent for innovation: Getting noticed in a global market incorporates case studies of the 34 companies selected as Technology Pioneers in biotechnology/health, energy/environmental technology, and information technology.
Leonardo Da Vinci unquestionably had it in the 15th century; so did Thomas Edison in the 19th century. But today, "talent for innovation" means something rather different. Innovation is no longer the work of one individual toiling in a workshop. In today's globalised, interconnected world, innovation is the work of teams, often based in particular innovation hotspots, and often collaborating with partners, suppliers and customers both nearby and in other countries.
Innovation has become a global activity as it has become easier for ideas and talented people to move from one country to another. This has both quickened the pace of technological development and presented many new opportunities, as creative individuals have become increasingly prized and there has been greater recognition of new sources of talent, beyond the traditional innovation hotspots of the developed world.
The result is a global exchange of ideas, and a global market for innovation talent. Along with growth in international trade and foreign direct investment, the mobility of talent is one of the hallmarks of modern globalisation. Talented innovators are regarded by companies, universities and governments as a vital resource, as precious as oil or water. They are sought after for the simple reason that innovation in products and services is generally agreed to be a large component, if not the largest component, in driving economic growth. It should be noted that "innovation" in this context does not simply mean the development of new, cutting-edge technologies by researchers.
It also includes the creative ways in which other people then refine, repackage and combine those technologies and bring them to market. Indeed, in his recent book, "The Venturesome Economy", Amar Bhidé, professor of business at Columbia University, argues that such "orchestration" of innovation can actually be more important in driving economic activity than pure research. "In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential," he writes. Ideas cross borders not just in the form of research papers, e-mails and web pages, but also inside the heads of talented people. This movement of talent is not simply driven by financial incentives. Individuals may also be motivated by a desire for greater academic freedom, better access to research facilities and funding, or the opportunity to work with key researchers in a particular field.
Countries that can attract talented individuals can benefit from more rapid economic growth, closer collaboration with the countries where those individuals originated, and the likelihood that immigrant entrepreneurs will set up new companies and create jobs. Mobility of talent helps to link companies to sources of foreign innovation and research expertise, to the benefit of both. Workers who emigrate to another country may bring valuable knowledge of their home markets with them, which can subsequently help companies in the destination country to enter those markets more easily. Analysis of scientific journals suggests that international co-authorship is increasing, and there is some evidence thatcollaborative work has a greater impact than work carried out in one country. Skilled individuals also act as repositories of knowledge, training the next generation and passing on their accumulated wisdom.
But the picture is complicated by a number of concerns. In developed countries which have historically depended to a large extent on foreign talent (such as the United States), there is anxiety that it is becoming increasingly difficult to attract talent as new opportunities arise elsewhere. Compared with the situation a decade ago, Indian software engineers, for example, may be more inclined to set up a company in India, rather than moving to America to work for a software company there. In developed countries that have not historically relied on foreign talent (such as Germany), meanwhile, the ageing of the population as the birth rate falls and life expectancy increases means there is a need to widen the supply of talent, as skilled workers leave the workforce and young people show less interest than they used to in technical subjects. And in developing countries, where there is a huge supply of new talent (hundreds of thousands of engineers graduate from Indian and Chinese universities every year), the worry is that these graduates have a broad technical grounding but may lack the specialised skills demanded by particular industries.
Other shifts are also under way. The increasing sophistication of emerging economies (notably India and China) is overturning the old model of "create in the West, customise for the East". Indian and Chinese companies are now globally competitive in many industries. And although the mobility of talent is increasing, workers who move to another country are less likely to stay for the long-term, and are more likely to return to their country of origin. The number of Chinese students studying abroad increased from 125,000 in 2002 to 134,000 in 2006, for example, but the proportion who stayed in the country where they studied after graduating fell from 85% to 69% over the same period, according to figures from the OECD (see page 10).
What is clear is that the emergence of a global market for talent means gifted innovators are more likely to be able to succeed, and new and unexpected opportunities are being exploited, as this year's Technology Pioneers demonstrate. They highlight three important aspects of the global market for talent: the benefits of mobility, the significant role of diasporas, and the importance of network effects in catalysing innovation.
Brain drain, or gain?
Perhaps the most familiar aspect of the debate about flows of talent is the widely expressed concern about the "brain drain" from countries that supply talented workers. If a country educates workers at the taxpayers' expense, does it not have a claim on their talent? There are also worries that the loss of skilled workers can hamper institutional development and drive up the cost of technical services. But such concerns must be weighed against the benefits of greater mobility.
There are not always opportunities for skilled individuals in their country of birth. The prospect of emigration can encourage the development of skills by individuals who may not in fact decide to emigrate. Workers who emigrate may send remittances back to their families at home, which can be a significant source of income and can help to alleviate poverty. And skilled workers may return to their home countries after a period working abroad, further stimulating knowledge transfer and improving the prospects for domestic growth, since they will maintain contacts with researchers overseas. As a result, argues a recent report from the OECD, it makes more sense to talk of a complex process of "brain circulation" rather than a one-way "brain drain". The movement of talent is not simply a zero-sum gain in which sending countries lose, and receiving countries benefit. Greater availability and mobility of talent opens up new possibilities and can benefit everyone.
Consider, for example, BioMedica Diagnostics of Windsor, Nova Scotia. The company makes medical diagnostic systems, some of them battery-operated, that can be used to provide health care in remote regions to people who would otherwise lack access to it. It was founded by Abdullah Kirumira, a Ugandan biochemist who moved to Canada in 1990 and became a professor at Acadia University. There he developed a rapid test for HIV in conjunction with one of his students, Hermes Chan (a native of Hong Kong who had moved to Canada to study). According to the United States Centers for Disease Control, around one-third of people tested for HIV do not return to get the result when it takes days or weeks to determine. Dr Kirumira and Dr Chan developed a new test that provides the result in three minutes, so that a diagnosis can be made on the spot. Dr Kirumira is a prolific inventor who went on to found several companies, and has been described as "the pioneer of Nova Scotia's biotechnology sector".
Today BioMedica makes a range of diagnostic products that are portable, affordable and robust, making them ideally suited for use in developing countries. They allow people to be rapidly screened for a range of conditions, including HIV, hepatitis, malaria, rubella, typhoid and cholera. The firm's customers include the World Health Organisation. Providing such tests to patients in the developing world is a personal mission of Dr Kirumira's, but it also makes sound business sense: the market for invitro diagnostics in the developing world is growing by over 25% a year, the company notes, compared with growth of only 5% a year in developed nations.
Moving to Canada gave Dr Kirumira research opportunities and access to venture funding that were not available in Uganda. His innovations now provide an affordable way for hospitals in his native continent of Africa to perform vital tests. A similar example is provided by mPedigree, a start-up that has developed a mobile-phone-based system that allows people to verify the authenticity of medicines. Counterfeit drugs are widespread in the developing world: they are estimated to account for 10-25% of all drugs sold, and over 80% in some countries. The World Health Organisation estimates that a fake vaccine for meningitis, distributed in Niger in 1995, killed over 2,500 people. mPedigree was established by Bright Simons, a Ghanaian social entrepreneur, in conjunction with Ashifi Gogo, a fellow Ghanaian. The two were more than just acquaintances having met at Secondary School. There are many high-tech authentication systems available in the developed world for drug packaging, involving radio-frequency identification (RFID) chips, DNA tags, and so forth.
The mPedigree system developed my Mr Gogo, an engineering student, is much cheaper and simpler and only requires the use of a mobile phone — an item that is now spreading more quickly in Africa than in any other region of the world. Once the drugs have been purchased, a panel on the label is scratched off to reveal a special code. The patient then sends this code, by text message, to a particular number. The code is looked up in a database and a message is sent back specifying whether the drugs are genuine. The system is free to use because the drug companies cover the cost of the text messages. It was launched in Ghana in 2007, and mPedigree's founders hope to extend it to all 48 sub-Saharan African countries within a decade, and to other parts of in the developing world.
The effort is being supported by Ghana's Food and Drug Board, and by local telecoms operators and drug manufacturers. Mr Gogo has now been admitted into a special progamme at Dartmouth College in the United States that develops entrepreneurial skills, in addition to technical skills, in engineers. Like Dr Kirumira, he is benefiting from opportunities that did not exist in his home country, and his country is benefiting too. This case of mPedigree shows that it is wrong to assume that the movement of talent is one-way (from poor to rich countries) and permanent. As it has become easier to travel and communications technology has improved, skilled workers have become more likely to spend brief spells in other countries that provide opportunities, rather than emigrating permanently.
And many entrepreneurs and innovators shuttle between two or more places — between Tel Aviv and Silicon Valley, for example, or Silicon Valley and Hsinchu in Taiwan — in a pattern of "circular" migration, in which it is no longer meaningful to distinguish between "sending" and "receiving" countries.
The benefits of a diaspora
Migration (whether temporary, permanent or circular) to a foreign country can be facilitated by the existence of a diaspora, since it can be easier to adjust to a new culture when you are surrounded by compatriots who have already done so. Some observers worry that diasporas make migration too easy, in the sense that they may encourage a larger number of talented individuals to leave their home country than would otherwise be the case, to the detriment of that country.
But as with the broader debate about migration, this turns out to be only part of the story. Diasporas can have a powerful positive effect in promoting innovation and benefiting the home country. Large American technology firms, for example, have set up research centres in India in part because they have been impressed by the calibre of the migrant Indian engineers they have employed in America. Diasporas also provide a channel for knowledge and skills to pass back to the home country.
James Nakagawa, a Canadian of Japanese origin and the founder of Mobile Healthcare, is a case in point. A third-generation immigrant, he grew up in Canada but decided in 1994 to move to Japan, where he worked for a number of technology firms and set up his own financial-services consultancy. In 2000 he had the idea that led him to found Mobile Healthcare, when a friend was diagnosed with diabetes and lamented that he found it difficult to determine which foods to eat, and which to avoid.
The rapid spread of advanced mobile phones in Japan, a world leader in mobile telecoms, prompted Mr Nakagawa to devise Lifewatcher, Mobile Healthcare's main product. It is a "disease selfmanagement system" used in conjunction with a doctor, based around a secure online database that can be accessed via a mobile phone. Patients record what medicines they are taking and what food they are eating, taking a picture of each meal. A database of common foodstuffs, including menu items from restaurants and fast-food chains, helps users work out what they can safely eat. Patients can also call up their medical records to follow the progress of key health indicators, such as blood sugar, blood pressure, cholesterol levels and calorie intake.
All of this information can also be accessed online by the patient's doctor or nutritionist. The system allows people with diabetes or obesity (both of which are rapidly becoming more prevalent in Japan and elsewhere) to take an active role in managing their conditions. Mr Nakagawa did three months of research in the United States and Canada while developing Lifewatcher, which was created with support from Apple (which helped with hardware and software), the Japanese Red Cross and Japan's Ministry of Health and Welfare (which provided full access to its nutritional database).
Japanese patients who are enrolled in the system have 70% of the cost covered by their health insurance. Mr Nakagawa is now working to introduce Lifewatcher in the United States and Canada, where obesity and diabetes are also becoming more widespread — along advanced mobile phones of the kind once only found in Japan. Mr Nakagawa's ability to move freely between Japanese and North American cultures, combining the telecoms expertise of the former with the entrepreneurial approach of the latter, has resulted in a system that can benefit both.
The story of Calvin Chin, the Chinese-American founder of Qifang, is similar. Mr Chin was born and educated in America, and worked in the financial services and technology industries for several years before moving to China. Expatriate Chinese who return to the country, enticed by opportunities in its fast-growing economy, are known as "returning turtles". Qifang is a "peer to peer" (P2P) lending site that enables students to borrow money to finance their education from other users of the site. P2P lending has been pioneered in other countries by sites such as Zopa and Prosper in other countries.
Such sites require would-be borrowers to provide a range of personal details about themselves to reassure lenders, and perform credit checks on them. Borrowers pay above-market rates, which is what attracts lenders. Qifang adds several twists to this formula. It is concentrating solely on student loans, which means that regulators are more likely to look favourably on the company's unusual business model. It allows payments to be made directly to educational institutions, to make sure the money goes to the right place. Qifang also requires borrowers to give their parents' names when taking out a loan, which increases the social pressure on them not to default, since that would cause the family to lose face.
Mr Chin has thus tuned an existing business model to take account of the cultural and regulatory environment in China, where P2P lending could be particularly attractive, given the relatively undeveloped state of China's financial-services market. In a sense, Qifang is just an updated, online version of the community group-lending schemes that are commonly used to finance education in China. The company's motto is that "everyone should be able to get an education, no matter their financial means".
Just as Mr Chin is trying to use knowledge acquired in the developed world to help people in his mother country of China, Sachin Duggal hopes his company, Nivio, will do something similar for people in India. Mr Duggal was born in Britain and is of Indian extraction. He worked in financial services, including a stint as a technologist at Deutsche Bank, before setting up Nivio, which essentially provides a PC desktop, personalised with a user's software and documents, that can be accessed from any web browser.
This approach makes it possible to centralise the management of PCs in a large company, and is already popular in the business world. But Mr Duggal hopes that it will also make computing more accessible to people who find the prospect of owning and managing their own PCs (and dealing with spam and viruses) too daunting, or simply cannot afford a PC at all. Nivio's software was developed in India, where Mr Duggal teamed up with Iqbal Gandham, the founder of Net4India, one of India's first internet service providers. Mr Duggal believes that the "virtual webtop" model could have great potential in extending access to computers to rural parts of India, and thus spreading the opportunities associated with the country's high-tech boom. A survey of the bosses of Indian software firms clearly shows how diasporas can promote innovation.
It found that those bosses who had lived abroad and returned to India made far more use of diaspora links upon their return than entrepreneurs who had never lived abroad, which gave them access to capital and skills in other countries. Diasporas can, in other words, help to ensure that "brain drain" does indeed turn into "brain gain", provided the government of the country in question puts appropriate policies in place to facilitate the movement of people, technology and capital.
Making the connection
Multinational companies can also play an important role in providing new opportunities for talented individuals, and facilitating the transfer of skills. In recent years many technology companies have set up large operations in India, for example, in order to benefit from the availability of talented engineers and the services provided by local companies. Is this simply exploitation of low-paid workers by Western companies?
The example of JiGrahak Mobility Solutions, a start-up based in Bangalore, illustrates why it is not. The company was founded by Sourabh Jain, an engineering graduate from the Delhi Institute of Technology. After completing his studies he went to work for the Indian research arm of Lucent Technologies, an American telecoms-equipment firm. This gave him a solid grounding in mobile-phone technology, which subsequently enabled him to set up JiGrahak, a company that provides a mobile-commerce service called Ngpay.
In India, where many people first experience the internet on a mobile phone, rather than a PC, and where mobile phones are far more widespread than PCs, there is much potential for phone-based shopping and payment services. Ngpay lets users buy tickets, pay bills and transfer money using their handsets. Such is its popularity that with months of its launch in 2008, Ngpay accounted for 4% of ticket sales at Fame, an Indian cinema chain.
The role of large companies in nurturing talented individuals, who then leave to set up their own companies, is widely understood in Silicon Valley. Start-ups are often founded by alumni from Sun, HP, Oracle and other big names. Rather than worrying that they could be raising their own future competitors, large companies understand that the resulting dynamic, innovative environment benefits everyone, as large firms spawn, compete with and acquire smaller ones.
As large firms establish outposts in developing countries, such catalysis of innovation is becoming more widespread. Companies with large numbers of employees and former employees spread around the world can function rather like a corporate diaspora, in short, providing another form of network along which skills and technology can diffuse. The network that has had the greatest impact on spreading ideas, promoting innovation and allowing potential partners to find out about each other's research is, of course, the internet. As access to the internet becomes more widespread, it can allow developing countries to link up more closely with developed countries, as the rise of India's software industry illustrates. But it can also promote links between developing countries.
The Cows to Kilowatts Partnership, based in Nigeria, provides an unusual example. It was founded by Joseph Adelagan, a Nigerian engineer, who was concerned about the impact on local rivers of effluent from the Bodija Market abattoir in Ibadan. As well as the polluting the water supply of several nearby villages, the effluent carried animal diseases that could be passed to humans. Dr Adelagan proposed setting up an effluent-treatment plant.
He discovered, however, that although treating the effluent would reduce water pollution, the process would produce carbon-dioxide and methane emissions that contribute to climate change. So he began to look for ways to capture these gases and make use of them. Researching the subject online, he found that a research institution in Thailand, the Centre for Waste Utilisation and Management at King Mongkut University of Technology Thonburi, had developed anaerobic reactors that could transform agro-industrial waste into biogas. He made contact with the Thai researchers, and together they developed a version of the technology
suitable for use in Nigeria that turns the abattoir waste into clean household cooking gas and organic fertiliser, thus reducing the need for expensive chemical fertiliser. The same approach could be applied across Africa, Dr Adelagan believes. The Cows to Kilowatts project illustrates the global nature of modern innovation, facilitated by the free movement of both ideas and people. Thanks to the internet, people in one part of the world can easily make contact with people trying to solve similar problems elsewhere.
Lessons learned
What policies should governments adopt in order to develop and attract innovation talent, encourage its movement and benefit from its circulation? At the most basic level, investment in education is vital. Perhaps surprisingly, however, Amar Bhidé of Columbia University suggests that promoting innovation does not mean pushing as many students as possible into technical subjects.
Although researchers and technologists provide the raw material for innovation, he points out, a crucial role in orchestrating innovation is also played by entrepreneurs who may not have a technical background. So it is important to promote a mixture of skills. A strong education system also has the potential to attract skilled foreign students, academics and researchers, and gives foreign companies an incentive to establish nearby research and development operations.
Many countries already offer research grants, scholarships and tax benefits to attract talented immigrants. In many cases immigration procedures are "fast tracked" for individuals working in science and technology. But there is still scope to remove barriers to the mobility of talent. Mobility of skilled workers increasingly involves short stays, rather than permanent moves, but this is not yet widely reflected in immigration policy. Removing barriers to short-term stays can increase "brain circulation" and promote diaspora links.
Another problem for many skilled workers is that their qualifications are not always recognised in other countries. Greater harmonisation of standards for qualifications is one way to tackle this problem; some countries also have formal systems to evaluate foreign qualifications and determine their local equivalents. Countries must also provide an open and flexible business environment to ensure that promising innovations can be brought to market. If market access or financial backing are not available, after all, today's global-trotting innovators increasingly have the option of going elsewhere.
The most important point is that the global competition for talent is not a zero-sum game in which some countries win, and others lose. As the Technology Pioneers described here demonstrate, the nature of innovation, and the global movement of talent and ideas, is far more complicated that the simplistic notion of a "talent war" between developed and developing nations would suggest. Innovation is a global activity, and granting the greatest possible freedom to innovators can help to ensure that the ideas they generate will benefit the greatest possible number of people.
Integrated Transformation: How rising customer expectations are turning com...
Modern customers have it good. Spoilt for choice and convenience, today’s empowered consumers have come to expect more from the businesses they interact with. This doesn’t just apply to their wanting a quality product at a fair price, but also tailored goods, swift and effective customer service across different channels, and a connected experience across their online shopping and in-store experience, with easy access to information they need when they want it.
Meeting these expectations is a significant challenge for organisations. For many, it requires restructuring long-standing operating models, re-engineering business processes and adopting a fundamental shift in mindset to put customer experience at the heart of business decision- making. Download our report to learn more.
The marriage of high tech and high finance
The marriage of high tech and high finance
At French bank BNP Paribas, chief executive Jean-Laurent Bonnafé is on a mission to build what he calls “the bank of the future”. He is clearly prepared to give his plan some serious financial backing: in February 2017 the bank announced that it would double its investment in financial services technology over the next three years to €3bn (US$3.35bn) to deliver three main goals: digital transformation, new customer experiences, and efficiency savings.
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Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
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Accelerating urban intelligence: People, business and the cities of tomorro...
About the research
Accelerating urban intelligence: People, business and the cities of tomorrow is an Economist Intelligence Unit report, sponsored by Nutanix. It explores expectations of citizens and businesses for smart-city development in some of the world’s major urban centres. The analysis is based on two parallel surveys conducted in 19 cities: one of 6,746 residents and another of 969 business executives. The cities included are Amsterdam, Copenhagen, Dubai, Frankfurt, Hong Kong, Johannesburg, London, Los Angeles, Mumbai, New York, Paris, Riyadh, San Francisco, São Paulo, Singapore, Stockholm, Sydney, Tokyo and Zurich.
Respondents to the citizen survey were evenly balanced by age (roughly one-third in each of the 18-38, 39-54 and 55 years and older age groups) and gender. A majority (56%) had household incomes above the median level in their city, with 44% below it. Respondents to the business survey were mainly senior executives (65% at C-suite or director level) working in a range of different functions. They work in large, midsize and small firms in over a dozen industries. See the report appendix for full survey results and demographics.
Additional insights were obtained from indepth interviews with city officials, smart-city experts at NGOs and other institutions, and business executives. We would like to thank the following individuals for their time and insights.
Pascual Berrone, academic co-director, Cities in Motion, and professor, strategic management, IESE Business School (Barcelona) Lawrence Boya, director, Smart City Programme, city of Johannesburg Amanda Daflos, chief innovation officer, city of Los Angeles Linda Gerull, chief information officer, city of San Francisco Praveen Pardeshi, municipal commissioner, Brihanmumbai Municipal Corporation (Mumbai) • Brian Roberts, policy analyst, city of San Francisco Sameer Sharma, global general manager, Internet of Things (IoT), Intel • Marius Sylvestersen, programme director, Copenhagen Solutions Lab Tan Kok Yam, deputy secretary of the Smart Nation and Digital Government, Prime Minister’s Office, SingaporeThe report was written by Denis McCauley and edited by Michael Gold.
Talent for innovation
Talent for innovation: Getting noticed in a global market incorporates case studies of the 34 companies selected as Technology Pioneers in biotechnology/health, energy/environmental technology, and information technology.
Leonardo Da Vinci unquestionably had it in the 15th century; so did Thomas Edison in the 19th century. But today, "talent for innovation" means something rather different. Innovation is no longer the work of one individual toiling in a workshop. In today's globalised, interconnected world, innovation is the work of teams, often based in particular innovation hotspots, and often collaborating with partners, suppliers and customers both nearby and in other countries.
Innovation has become a global activity as it has become easier for ideas and talented people to move from one country to another. This has both quickened the pace of technological development and presented many new opportunities, as creative individuals have become increasingly prized and there has been greater recognition of new sources of talent, beyond the traditional innovation hotspots of the developed world.
The result is a global exchange of ideas, and a global market for innovation talent. Along with growth in international trade and foreign direct investment, the mobility of talent is one of the hallmarks of modern globalisation. Talented innovators are regarded by companies, universities and governments as a vital resource, as precious as oil or water. They are sought after for the simple reason that innovation in products and services is generally agreed to be a large component, if not the largest component, in driving economic growth. It should be noted that "innovation" in this context does not simply mean the development of new, cutting-edge technologies by researchers.
It also includes the creative ways in which other people then refine, repackage and combine those technologies and bring them to market. Indeed, in his recent book, "The Venturesome Economy", Amar Bhidé, professor of business at Columbia University, argues that such "orchestration" of innovation can actually be more important in driving economic activity than pure research. "In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential," he writes. Ideas cross borders not just in the form of research papers, e-mails and web pages, but also inside the heads of talented people. This movement of talent is not simply driven by financial incentives. Individuals may also be motivated by a desire for greater academic freedom, better access to research facilities and funding, or the opportunity to work with key researchers in a particular field.
Countries that can attract talented individuals can benefit from more rapid economic growth, closer collaboration with the countries where those individuals originated, and the likelihood that immigrant entrepreneurs will set up new companies and create jobs. Mobility of talent helps to link companies to sources of foreign innovation and research expertise, to the benefit of both. Workers who emigrate to another country may bring valuable knowledge of their home markets with them, which can subsequently help companies in the destination country to enter those markets more easily. Analysis of scientific journals suggests that international co-authorship is increasing, and there is some evidence thatcollaborative work has a greater impact than work carried out in one country. Skilled individuals also act as repositories of knowledge, training the next generation and passing on their accumulated wisdom.
But the picture is complicated by a number of concerns. In developed countries which have historically depended to a large extent on foreign talent (such as the United States), there is anxiety that it is becoming increasingly difficult to attract talent as new opportunities arise elsewhere. Compared with the situation a decade ago, Indian software engineers, for example, may be more inclined to set up a company in India, rather than moving to America to work for a software company there. In developed countries that have not historically relied on foreign talent (such as Germany), meanwhile, the ageing of the population as the birth rate falls and life expectancy increases means there is a need to widen the supply of talent, as skilled workers leave the workforce and young people show less interest than they used to in technical subjects. And in developing countries, where there is a huge supply of new talent (hundreds of thousands of engineers graduate from Indian and Chinese universities every year), the worry is that these graduates have a broad technical grounding but may lack the specialised skills demanded by particular industries.
Other shifts are also under way. The increasing sophistication of emerging economies (notably India and China) is overturning the old model of "create in the West, customise for the East". Indian and Chinese companies are now globally competitive in many industries. And although the mobility of talent is increasing, workers who move to another country are less likely to stay for the long-term, and are more likely to return to their country of origin. The number of Chinese students studying abroad increased from 125,000 in 2002 to 134,000 in 2006, for example, but the proportion who stayed in the country where they studied after graduating fell from 85% to 69% over the same period, according to figures from the OECD (see page 10).
What is clear is that the emergence of a global market for talent means gifted innovators are more likely to be able to succeed, and new and unexpected opportunities are being exploited, as this year's Technology Pioneers demonstrate. They highlight three important aspects of the global market for talent: the benefits of mobility, the significant role of diasporas, and the importance of network effects in catalysing innovation.
Brain drain, or gain?
Perhaps the most familiar aspect of the debate about flows of talent is the widely expressed concern about the "brain drain" from countries that supply talented workers. If a country educates workers at the taxpayers' expense, does it not have a claim on their talent? There are also worries that the loss of skilled workers can hamper institutional development and drive up the cost of technical services. But such concerns must be weighed against the benefits of greater mobility.
There are not always opportunities for skilled individuals in their country of birth. The prospect of emigration can encourage the development of skills by individuals who may not in fact decide to emigrate. Workers who emigrate may send remittances back to their families at home, which can be a significant source of income and can help to alleviate poverty. And skilled workers may return to their home countries after a period working abroad, further stimulating knowledge transfer and improving the prospects for domestic growth, since they will maintain contacts with researchers overseas. As a result, argues a recent report from the OECD, it makes more sense to talk of a complex process of "brain circulation" rather than a one-way "brain drain". The movement of talent is not simply a zero-sum gain in which sending countries lose, and receiving countries benefit. Greater availability and mobility of talent opens up new possibilities and can benefit everyone.
Consider, for example, BioMedica Diagnostics of Windsor, Nova Scotia. The company makes medical diagnostic systems, some of them battery-operated, that can be used to provide health care in remote regions to people who would otherwise lack access to it. It was founded by Abdullah Kirumira, a Ugandan biochemist who moved to Canada in 1990 and became a professor at Acadia University. There he developed a rapid test for HIV in conjunction with one of his students, Hermes Chan (a native of Hong Kong who had moved to Canada to study). According to the United States Centers for Disease Control, around one-third of people tested for HIV do not return to get the result when it takes days or weeks to determine. Dr Kirumira and Dr Chan developed a new test that provides the result in three minutes, so that a diagnosis can be made on the spot. Dr Kirumira is a prolific inventor who went on to found several companies, and has been described as "the pioneer of Nova Scotia's biotechnology sector".
Today BioMedica makes a range of diagnostic products that are portable, affordable and robust, making them ideally suited for use in developing countries. They allow people to be rapidly screened for a range of conditions, including HIV, hepatitis, malaria, rubella, typhoid and cholera. The firm's customers include the World Health Organisation. Providing such tests to patients in the developing world is a personal mission of Dr Kirumira's, but it also makes sound business sense: the market for invitro diagnostics in the developing world is growing by over 25% a year, the company notes, compared with growth of only 5% a year in developed nations.
Moving to Canada gave Dr Kirumira research opportunities and access to venture funding that were not available in Uganda. His innovations now provide an affordable way for hospitals in his native continent of Africa to perform vital tests. A similar example is provided by mPedigree, a start-up that has developed a mobile-phone-based system that allows people to verify the authenticity of medicines. Counterfeit drugs are widespread in the developing world: they are estimated to account for 10-25% of all drugs sold, and over 80% in some countries. The World Health Organisation estimates that a fake vaccine for meningitis, distributed in Niger in 1995, killed over 2,500 people. mPedigree was established by Bright Simons, a Ghanaian social entrepreneur, in conjunction with Ashifi Gogo, a fellow Ghanaian. The two were more than just acquaintances having met at Secondary School. There are many high-tech authentication systems available in the developed world for drug packaging, involving radio-frequency identification (RFID) chips, DNA tags, and so forth.
The mPedigree system developed my Mr Gogo, an engineering student, is much cheaper and simpler and only requires the use of a mobile phone — an item that is now spreading more quickly in Africa than in any other region of the world. Once the drugs have been purchased, a panel on the label is scratched off to reveal a special code. The patient then sends this code, by text message, to a particular number. The code is looked up in a database and a message is sent back specifying whether the drugs are genuine. The system is free to use because the drug companies cover the cost of the text messages. It was launched in Ghana in 2007, and mPedigree's founders hope to extend it to all 48 sub-Saharan African countries within a decade, and to other parts of in the developing world.
The effort is being supported by Ghana's Food and Drug Board, and by local telecoms operators and drug manufacturers. Mr Gogo has now been admitted into a special progamme at Dartmouth College in the United States that develops entrepreneurial skills, in addition to technical skills, in engineers. Like Dr Kirumira, he is benefiting from opportunities that did not exist in his home country, and his country is benefiting too. This case of mPedigree shows that it is wrong to assume that the movement of talent is one-way (from poor to rich countries) and permanent. As it has become easier to travel and communications technology has improved, skilled workers have become more likely to spend brief spells in other countries that provide opportunities, rather than emigrating permanently.
And many entrepreneurs and innovators shuttle between two or more places — between Tel Aviv and Silicon Valley, for example, or Silicon Valley and Hsinchu in Taiwan — in a pattern of "circular" migration, in which it is no longer meaningful to distinguish between "sending" and "receiving" countries.
The benefits of a diaspora
Migration (whether temporary, permanent or circular) to a foreign country can be facilitated by the existence of a diaspora, since it can be easier to adjust to a new culture when you are surrounded by compatriots who have already done so. Some observers worry that diasporas make migration too easy, in the sense that they may encourage a larger number of talented individuals to leave their home country than would otherwise be the case, to the detriment of that country.
But as with the broader debate about migration, this turns out to be only part of the story. Diasporas can have a powerful positive effect in promoting innovation and benefiting the home country. Large American technology firms, for example, have set up research centres in India in part because they have been impressed by the calibre of the migrant Indian engineers they have employed in America. Diasporas also provide a channel for knowledge and skills to pass back to the home country.
James Nakagawa, a Canadian of Japanese origin and the founder of Mobile Healthcare, is a case in point. A third-generation immigrant, he grew up in Canada but decided in 1994 to move to Japan, where he worked for a number of technology firms and set up his own financial-services consultancy. In 2000 he had the idea that led him to found Mobile Healthcare, when a friend was diagnosed with diabetes and lamented that he found it difficult to determine which foods to eat, and which to avoid.
The rapid spread of advanced mobile phones in Japan, a world leader in mobile telecoms, prompted Mr Nakagawa to devise Lifewatcher, Mobile Healthcare's main product. It is a "disease selfmanagement system" used in conjunction with a doctor, based around a secure online database that can be accessed via a mobile phone. Patients record what medicines they are taking and what food they are eating, taking a picture of each meal. A database of common foodstuffs, including menu items from restaurants and fast-food chains, helps users work out what they can safely eat. Patients can also call up their medical records to follow the progress of key health indicators, such as blood sugar, blood pressure, cholesterol levels and calorie intake.
All of this information can also be accessed online by the patient's doctor or nutritionist. The system allows people with diabetes or obesity (both of which are rapidly becoming more prevalent in Japan and elsewhere) to take an active role in managing their conditions. Mr Nakagawa did three months of research in the United States and Canada while developing Lifewatcher, which was created with support from Apple (which helped with hardware and software), the Japanese Red Cross and Japan's Ministry of Health and Welfare (which provided full access to its nutritional database).
Japanese patients who are enrolled in the system have 70% of the cost covered by their health insurance. Mr Nakagawa is now working to introduce Lifewatcher in the United States and Canada, where obesity and diabetes are also becoming more widespread — along advanced mobile phones of the kind once only found in Japan. Mr Nakagawa's ability to move freely between Japanese and North American cultures, combining the telecoms expertise of the former with the entrepreneurial approach of the latter, has resulted in a system that can benefit both.
The story of Calvin Chin, the Chinese-American founder of Qifang, is similar. Mr Chin was born and educated in America, and worked in the financial services and technology industries for several years before moving to China. Expatriate Chinese who return to the country, enticed by opportunities in its fast-growing economy, are known as "returning turtles". Qifang is a "peer to peer" (P2P) lending site that enables students to borrow money to finance their education from other users of the site. P2P lending has been pioneered in other countries by sites such as Zopa and Prosper in other countries.
Such sites require would-be borrowers to provide a range of personal details about themselves to reassure lenders, and perform credit checks on them. Borrowers pay above-market rates, which is what attracts lenders. Qifang adds several twists to this formula. It is concentrating solely on student loans, which means that regulators are more likely to look favourably on the company's unusual business model. It allows payments to be made directly to educational institutions, to make sure the money goes to the right place. Qifang also requires borrowers to give their parents' names when taking out a loan, which increases the social pressure on them not to default, since that would cause the family to lose face.
Mr Chin has thus tuned an existing business model to take account of the cultural and regulatory environment in China, where P2P lending could be particularly attractive, given the relatively undeveloped state of China's financial-services market. In a sense, Qifang is just an updated, online version of the community group-lending schemes that are commonly used to finance education in China. The company's motto is that "everyone should be able to get an education, no matter their financial means".
Just as Mr Chin is trying to use knowledge acquired in the developed world to help people in his mother country of China, Sachin Duggal hopes his company, Nivio, will do something similar for people in India. Mr Duggal was born in Britain and is of Indian extraction. He worked in financial services, including a stint as a technologist at Deutsche Bank, before setting up Nivio, which essentially provides a PC desktop, personalised with a user's software and documents, that can be accessed from any web browser.
This approach makes it possible to centralise the management of PCs in a large company, and is already popular in the business world. But Mr Duggal hopes that it will also make computing more accessible to people who find the prospect of owning and managing their own PCs (and dealing with spam and viruses) too daunting, or simply cannot afford a PC at all. Nivio's software was developed in India, where Mr Duggal teamed up with Iqbal Gandham, the founder of Net4India, one of India's first internet service providers. Mr Duggal believes that the "virtual webtop" model could have great potential in extending access to computers to rural parts of India, and thus spreading the opportunities associated with the country's high-tech boom. A survey of the bosses of Indian software firms clearly shows how diasporas can promote innovation.
It found that those bosses who had lived abroad and returned to India made far more use of diaspora links upon their return than entrepreneurs who had never lived abroad, which gave them access to capital and skills in other countries. Diasporas can, in other words, help to ensure that "brain drain" does indeed turn into "brain gain", provided the government of the country in question puts appropriate policies in place to facilitate the movement of people, technology and capital.
Making the connection
Multinational companies can also play an important role in providing new opportunities for talented individuals, and facilitating the transfer of skills. In recent years many technology companies have set up large operations in India, for example, in order to benefit from the availability of talented engineers and the services provided by local companies. Is this simply exploitation of low-paid workers by Western companies?
The example of JiGrahak Mobility Solutions, a start-up based in Bangalore, illustrates why it is not. The company was founded by Sourabh Jain, an engineering graduate from the Delhi Institute of Technology. After completing his studies he went to work for the Indian research arm of Lucent Technologies, an American telecoms-equipment firm. This gave him a solid grounding in mobile-phone technology, which subsequently enabled him to set up JiGrahak, a company that provides a mobile-commerce service called Ngpay.
In India, where many people first experience the internet on a mobile phone, rather than a PC, and where mobile phones are far more widespread than PCs, there is much potential for phone-based shopping and payment services. Ngpay lets users buy tickets, pay bills and transfer money using their handsets. Such is its popularity that with months of its launch in 2008, Ngpay accounted for 4% of ticket sales at Fame, an Indian cinema chain.
The role of large companies in nurturing talented individuals, who then leave to set up their own companies, is widely understood in Silicon Valley. Start-ups are often founded by alumni from Sun, HP, Oracle and other big names. Rather than worrying that they could be raising their own future competitors, large companies understand that the resulting dynamic, innovative environment benefits everyone, as large firms spawn, compete with and acquire smaller ones.
As large firms establish outposts in developing countries, such catalysis of innovation is becoming more widespread. Companies with large numbers of employees and former employees spread around the world can function rather like a corporate diaspora, in short, providing another form of network along which skills and technology can diffuse. The network that has had the greatest impact on spreading ideas, promoting innovation and allowing potential partners to find out about each other's research is, of course, the internet. As access to the internet becomes more widespread, it can allow developing countries to link up more closely with developed countries, as the rise of India's software industry illustrates. But it can also promote links between developing countries.
The Cows to Kilowatts Partnership, based in Nigeria, provides an unusual example. It was founded by Joseph Adelagan, a Nigerian engineer, who was concerned about the impact on local rivers of effluent from the Bodija Market abattoir in Ibadan. As well as the polluting the water supply of several nearby villages, the effluent carried animal diseases that could be passed to humans. Dr Adelagan proposed setting up an effluent-treatment plant.
He discovered, however, that although treating the effluent would reduce water pollution, the process would produce carbon-dioxide and methane emissions that contribute to climate change. So he began to look for ways to capture these gases and make use of them. Researching the subject online, he found that a research institution in Thailand, the Centre for Waste Utilisation and Management at King Mongkut University of Technology Thonburi, had developed anaerobic reactors that could transform agro-industrial waste into biogas. He made contact with the Thai researchers, and together they developed a version of the technology
suitable for use in Nigeria that turns the abattoir waste into clean household cooking gas and organic fertiliser, thus reducing the need for expensive chemical fertiliser. The same approach could be applied across Africa, Dr Adelagan believes. The Cows to Kilowatts project illustrates the global nature of modern innovation, facilitated by the free movement of both ideas and people. Thanks to the internet, people in one part of the world can easily make contact with people trying to solve similar problems elsewhere.
Lessons learned
What policies should governments adopt in order to develop and attract innovation talent, encourage its movement and benefit from its circulation? At the most basic level, investment in education is vital. Perhaps surprisingly, however, Amar Bhidé of Columbia University suggests that promoting innovation does not mean pushing as many students as possible into technical subjects.
Although researchers and technologists provide the raw material for innovation, he points out, a crucial role in orchestrating innovation is also played by entrepreneurs who may not have a technical background. So it is important to promote a mixture of skills. A strong education system also has the potential to attract skilled foreign students, academics and researchers, and gives foreign companies an incentive to establish nearby research and development operations.
Many countries already offer research grants, scholarships and tax benefits to attract talented immigrants. In many cases immigration procedures are "fast tracked" for individuals working in science and technology. But there is still scope to remove barriers to the mobility of talent. Mobility of skilled workers increasingly involves short stays, rather than permanent moves, but this is not yet widely reflected in immigration policy. Removing barriers to short-term stays can increase "brain circulation" and promote diaspora links.
Another problem for many skilled workers is that their qualifications are not always recognised in other countries. Greater harmonisation of standards for qualifications is one way to tackle this problem; some countries also have formal systems to evaluate foreign qualifications and determine their local equivalents. Countries must also provide an open and flexible business environment to ensure that promising innovations can be brought to market. If market access or financial backing are not available, after all, today's global-trotting innovators increasingly have the option of going elsewhere.
The most important point is that the global competition for talent is not a zero-sum game in which some countries win, and others lose. As the Technology Pioneers described here demonstrate, the nature of innovation, and the global movement of talent and ideas, is far more complicated that the simplistic notion of a "talent war" between developed and developing nations would suggest. Innovation is a global activity, and granting the greatest possible freedom to innovators can help to ensure that the ideas they generate will benefit the greatest possible number of people.
Integrated Transformation: How rising customer expectations are turning com...
Modern customers have it good. Spoilt for choice and convenience, today’s empowered consumers have come to expect more from the businesses they interact with. This doesn’t just apply to their wanting a quality product at a fair price, but also tailored goods, swift and effective customer service across different channels, and a connected experience across their online shopping and in-store experience, with easy access to information they need when they want it.
Meeting these expectations is a significant challenge for organisations. For many, it requires restructuring long-standing operating models, re-engineering business processes and adopting a fundamental shift in mindset to put customer experience at the heart of business decision- making. Download our report to learn more.
A growing challenge: Hospitals operating in cost-constrained environment
A growing challenge: Hospitals operating in cost-constrained environment
Across the U.S., hospital executives are feeling pressure. Although growth rates in medical costs have slowed in recent years, hospitals now need to manage budgets within new payment contracts, such as value-based reimbursement and bundled payments. Unsurprisingly, then, an Economist Intelligence Unit (EIU) survey, sponsored by Prudential, revealed that costs are a dominant concern for hospitals and will shape business strategies in the years to come.
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Value-based healthcare in Sweden: Reaching the next level
The need to get better value from healthcare investment has never been more important as ageing populations and increasing numbers of people with multiple chronic conditions force governments to make limited financial resources go further.
These pressures, along with a greater focus on patient-centred care, have raised the profile of VBHC, especially in European healthcare systems. Sweden, with its highly comprehensive and egalitarian healthcare system, has been a leader in implementing VBHC from the beginning, a fact that was underscored in a 2016 global assessment of VBHC published by The Economist Intelligence Unit.
This paper looks at the ways in which Sweden has implemented VBHC, the areas in which it has faced obstacles and the lessons that it can teach other countries and health systems looking to improve the value of their own healthcare investments.
Breast cancer patients and survivors in the Asia-Pacific workforce
With more older women also working, how will the rising trend of breast cancer survivorship manifest in workplace policies, practices and culture? What challenges do breast cancer survivors face when trying to reintegrate into the workforce, or to continue working during treatment? How can governments, companies and society at large play a constructive role?
This series of reports looks at the situation for breast cancer survivors in Australia, New Zealand and South Korea. It finds that while progress has been made, more needs to be done, particularly in South Korea, where public stigma around cancer remains high.
The Cost of Silence
Cardiovascular diseases levy a substantial financial toll on individuals, their households and the public finances. These include the costs of hospital treatment, long-term disease management and recurring incidence of heart attacks and stroke. They also include the costs of functional impairment and knock-on costs as families may lose breadwinners or have to withdraw other family members from the workforce to care for a CVD patient. Governments also lose tax revenue due to early retirement and mortality, and can be forced to reallocate public finances from other budgets to maintain an accessible healthcare system in the face of rising costs.
As such, there is a need for more awareness of the ways in which people should actively work to reduce their CVD risk. There is also a need for more primary and secondary preventative support from health agencies, policymakers and nongovernmental groups.
To inform the decisions and strategies of these stakeholders, The Economist Intelligence Unit and EIU Healthcare, its healthcare subsidiary, have conducted a study of the prevalence and costs of the top four modifiable risk factors that contribute to CVDs across the Asian markets of China, Australia, Hong Kong, Japan, Singapore, South Korea, Taiwan and Thailand.
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The Big Bluff
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Click the thumbnail below to download the global executive summary.
Read additional articles from The EIU with detail on the shifting landscape of global wealth in Asia, Canada, the U.S. and UK on RBC's website.
Fintech in ASEAN
To better understand the opportunities and challenges in developing a fintech business in seven ASEAN markets, The Economist Intelligence Unit conducted wide-ranging desk research supplemented by seven in-depth interviews with executives in Australia and ASEAN.
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SMEs and Global Growth: The High-Tech Advantage
SMEs and Global Growth: The High-Tech Advantage
To a greater extent every day, information technology is levelling the playing field for small and mid-sized enterprises (SMEs). Export markets, in particular, are no longer the exclusive domain of large players with the resources to field global sales and production staffs. Today, even startups can use the Internet to sell abroad, and to commission foreign firms to produce their designs cheaply.
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SMEs and Global Growth: Finding Local Partners
Hoping to profit from a wave of investment in China by large multinationals, small and mid-sizedenterprises (SMEs) based in Germany flocked to that country in the 1990s. China’s government welcomed them: like many other countries, China was intrigued by Germany’s Mittelstand firms— usually stable, technologically sophisticated, family owned firm —and wanted to learn from them. But despite the welcome—or perhaps because of that desire to learn from the newcomers— China often required the newcomers to establish formal joint ventures with Chinese partners. This requirement did not diminish the German SMEs’ interest; indeed, many Mittelstand firms saw the joint ventures as a way to get acclimated in China.
Today, though, the partnership requirements have eased for the approximately 5,200 German firms invested in China. As a result, most German firms have decided to go it alone in the Chinese market. Turck Technology, a family-owned German industrial automation company with annual sales of around €500m, is a case in point. It established a wholly owned subsidiary in China rather than partner with a Chinese firm. Its aim was to maintain control, ensure consistent quality, and protect its designs. The firm’s Chinese sales are about €40m a year, “the same level as our competitors,” says Christoph Kaiser, Turck’s managing director.
By now, only 12% of the German companies invested in China use formal joint ventures, says Alexandra Voss, executive director of the German Chamber of Commerce in north China. “Where the former joint venture requirements no longer exist, German companies tend to purchase the joint venture shares from their former partner rather than extending the agreement,” she says.
JOINT-VENTURE “LIGHT”
Between the two extremes—a formal joint venture and a go-it-alone subsidiary—there is a wide range of looser partnerships possible between SMEs in different countries. Among the most popular such tie-ups are those involving licensing and technical co-operation agreements. The challenge for SMEs in these arrangements—as in full-fledged joint venture deals—is to preserve their proprietary information while benefitting from enhanced access to the local market.
For example, James Cropper, a family-owned UK paper maker, expanded internationally in recent years, to the point where around half of its £88m revenue now comes from export markets. In China, it signed a technical co-operation agreement with a local firm to design fibres for high-end carbon bicycles. Despite cooperating on adapting products for the local market, the agreement sets strict guidelines to protect James Cropper’s know-how. “We wanted to keep control of intellectual property,” says its CEO Phil Wild.
Licencing agreements are another way to boost foreign sales without requiring a formal joint venture. Under such agreements, a local company buys the rights to market (and sometimes produce and develop) the exporting firm’s brand or products. The local partner does not have equity rights, making such agreements popular among small exporters with limited capital.
Australian pharmaceuticals firm Suda and its Chinese partner Eddingpharm provide an example of a licencing agreement. Suda, with revenues of just A$6.3m a year, would have struggled to afford to expand into China in its own name, or to invest in a joint venture. In late 2015, it signed a licensing agreement with Eddingpharm to produce and sell its drugs in China. Among the sweeteners for Suda: an upfront payment of US$300,000 and another US$200,000 when its product is registered in China. For small companies, licencing can offer an immediate cash injection, as well as a way to enter new markets.
A “lighter” variant of a licencing agreement is a simple sales-representative deal, in which a local firm contracts to market, sell and distribute the exporting firm’s products in the target market. David Butler, CEO of the South African Chamber of Commerce in London, says many of his country’s food exporters take this approach in the UK, benefiting from the market reach of UK retail chains and specialist distribution firms.
Such arrangements can help to avoid the biggest danger inherent in full-fledged joint ventures: their high failure rate. McKinsey, the management consultancy, estimates that up to 60% of international ventures fail.1 Among the major problems: partners may have incompatible objectives, for example with one wanting to maximise long-term market share and the other wishing to make a quick profit. The US advisory firm Water Street Partners finds that around twothirds of joint venture CEOs say the owners are misaligned on long-term strategy and on budget issues.2 A more limited technical co-operation agreement can sidestep such fundamental issues.
MATCH-MAKERS
What all these partnerships—the full-fledged joint venture agreements and the “lighter” variants— share in common is the marriage of an exporting firm’s product know-how and a local firm’s market expertise. Regardless of the form that a partnership takes, the fundamental questions apply: how to find the right local partner, and how to structure the agreement to avoid common pitfalls.
“That’s the million dollar question,” says Mr Harris, the US lawyer. “[The answer] is usually based on the [specific] business involved. If you are an educational software company, you think about partnering with the top one or two companies in China that distribute or sell educational software. If you make high-end [technical] widgets, you may partner with the one or two best high-end widget companies in China—whose widgets, though high-end for China, are not nearly as good as yours, and therefore they could use your help. You find these companies yourself, or you hire a consultant to help you find them.”
The routes to finding foreign partners vary. James Cropper found its Chinese partner via the contacts it had made in the country by selling there directly. It sought out Chinese partners with expertise and complementary skills for its high-end fibres division. It also looked for Chinese firms with industry contacts and specialist expertise to sell to high-end bicycle manufacturers.
Indeed, the search for such partners is often mutual, with Chinese firms eager for foreign partnerships. Eddingpharm, the pharma company licensing products from Suda, first entered the business via licensing deals with multinational pharma companies Novartis and Baxter in the early 2000s. In 2012, backed by international investors, Eddingpharm established a US subsidiary to seek out other product lines for distribution in China, as well as deals to develop and market such products. Among its wins: an agreement with Suda to develop and market an insomnia drug which the small Australian company would have struggled to sell in China on its own.
Companies that lack contacts in a target foreign market often turn to consultants for help. Firms such as Prospect Chinese Services, which is staffed by Chinese nationals and has offices across the UK and China, advise clients ranging from hotels and universities to car manufacturers wishing to enter the Chinese market. It claims to offer a ‘one stop shop’ for UK companies, comprising market research and market entry strategy services, support with first contacts, and advice on negotiations.
Other match-makers include government export promotion agencies, which compile large databases of foreign companies and can put exporters in touch with potential foreign partners. Erin Butler of the US Export Assistance Centre says that US SMEs supplying the oil industry approached her for contacts in growth markets such as North Africa. Like James Cropper, the US oil industry suppliers also used their domestic sales forces to make initial contacts with potential foreign partners. The search criteria for finding the right local partners tend to be similar, across a range of businesses: that is, local partners who supply expertise, skills and contacts that are complementary to those of the exporting SME.
ACQUISITIONS-PLUS
Exporters making a long-term commitment to a foreign market often acquire a local company to establish a stable presence in that market. One example is Palfinger, an Austrian SME and construction-machinery maker, which bought companies across the world to access their markets and to diversify away from over-reliance on building mobile cranes. Its foreign plants gave Palfinger a lower-cost, more flexible production base to supply new markets, which in turn helped it to withstand a series of economic storms.
A buying spree was not Palfinger’s sole expansion tool, however. It also established joint ventures with local companies in some major export markets, particularly in China and Russia, using the partners’ local market dominance to boost its own sales. In 2012 Palfinger established two joint ventures with SANY, China’s biggest manufacturer of construction equipment. One of the ventures was established to sell Palfinger products in China, and the other to distribute SANY products outside of the country. In 2013 the companies agreed to a share swap, with SANY taking a 10% stake in Palfinger in exchange for an equal stake for Palfinger in one of SANY’s operating units. For Palfinger, this helped to cement a deep presence in China, while for SANY the deal boosted its own globalisation efforts.
In 2014, Palfinger set up two more joint ventures, this time with Russia’s largest truck maker Kamaz. One builds chassis to hold Palfinger’s mobile cranes, and the other produces cylinders for construction machinery. Under the deal, Palfinger agreed to invest in modernising the production plant. In return, Palfinger gained entry to Russia’s specialist construction machinery market. “We couldn’t buy them [SANY and Kamaz],” spokesman Hannes Roither says drily when asked why the firm chose joint ventures.
Significantly, the local ventures provided a buffer when local markets weakened, due to their strong local customer base. “There have been serious market crashes in both countries” in recent years, Mr Roither says. “But we were able to protect our own sales by increasing market share when foreign competitors withdrew from the country.”
Similarly, the German luxury hotel group Steigenberger set up a joint venture with a local company to accelerate its expansion into India. Steigenberger owns 116 hotels in 12 countries, generating 2013 revenues of €500m. In 2016 it announced a joint venture with MBD, an Indian hotel group, with Steigenberger retaining a controlling stake. MBD will manage the joint venture including sales, while the German company will manage international marketing, training and brand development.
The companies have complementary skills, with Steigenberger a leader in five-star hotel management and MBD an established player within India. Also, and equally crucially, they share the same aim: the rapid roll out of luxury hotels in India. The joint venture plans to open 20 hotels over the next 15 years. Managing Director Sonica Malhotra Kandhari says it would take between three and five years for either partner acting alone to open a single hotel.
KEYS TO SUCCESS
Structuring any type of partnership agreement with a foreign partner can be tricky, says Dan Harris, a founder of the US law firm Harris Bricken, which specialises in joint ventures in China. He advises clients to keep a majority stake in a joint venture, and to protect their intellectual property zealously regardless of the nature of the co-operation. He offers the cautionary tale of a US firm whose Chinese partner began to manufacture the US partner’s products under the Chinese firm’s name. Some remedies are simple: “Many times we find that the [US] company had not registered a patent in China,” Mr. Harris says.
Beyond that, a key to success is to look carefully at the fundamentals: ensuring that the partners’ skills and expertise are complementary to those of the exporting SME; establishing that the aims of both partners are aligned; and making long-term commitments to the target markets. These elements—complementary skills, similar aims, and long-term commitments—are as close as an SME can come to finding a recipe for success in forming international partnerships.
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SMEs and Global Growth: Navigating the Legal and Tax Maze
American statesman and inventor Benjamin Franklin once famously said that nothing is certain in life except death and taxes. Nowadays, no one is more painfully aware of that—at least the part about taxes—than small and midsized enterprises (SMEs) entering foreign markets for the first time.
The complexity of foreign tax, regulatory and legal regimes is the most frequently cited reason why SMEs avoid foreign markets. The range of such barriers is wide, encompassing different tax treatment for similar products in different countries, varying product-composition and packaging rules, different standards for protecting intellectual property (IP), and complicated customs clearance procedures even within a free trade area. While the specific legal and tax barriers vary widely, they all represent essentially the same problem for SMEs: high compliance costs and the risk that, when implemented, regulations will be interpreted in unfavourable ways.
Such risks and costs are at the root of SMEs’ reluctance to export. According to the Confederation of British Industry (CBI), only one-fourth of European companies export. Dutch entrepreneurs’ association MKB-Nederland says that only 20% of Dutch companies export; according to a survey by logistics giant UPS, only 10% of French companies export.
Complex tax and legal issues also explain why SMEs that do export tend to do so only within a free trade area. A large-scale survey of SME owners and directors in seven European countries, carried out by UPS1 in 2015, found that, in four of the seven countries looked at, the complications of clearing customs or of complying with export regulations was among the top three reasons for not exporting outside of the European Union.
Overall, around 80% of EU-based SME exporters confine their exporting to the EU, according to Ben Digby, the CBI’s international director. Others venture farther afield, but to markets with which the EU has a free trade agreement, such as South Korea. An example is offered by UK pottery and tableware manufacturer Portmeirion: It says its export business to South Korea skyrocketed after the country signed a free trade agreement with the EU in 2010. By 2011, South Korea had surpassed the company’s home market in the UK, and became its second-biggest market after the US.
A LABYRINTH OF HEALTH RULES
Examples such as Portmeirion’s should not suggest that a free trade agreement sweeps away all legal and regulatory complications for exporters. Nothing could be further from the truth. Even within the EU single market, among countries with similar standards for products and services, legal and regulatory hurdles arise for exporters. An example is the maze of national rules that determine which pharmaceuticals qualify for medical prescriptions within the national health system.
Laboratoires Expanscience, a French pharmaceuticals SME specialising in skin cosmetics, faced such a problem in the UK. It entered the UK market a few years ago with, among other products, a range of skin creams under the Mustela brand; the creams are used for treating babies’ minor skin problems, among other uses. However, the firm’s UK sales are limited (currently below £1 million a year) because its products are not registered for prescription by the National Health Service (NHS). Registering with the NHS is an expensive and time consuming process: Raj Sandhan, the managing director of Expanscience’s UK distributor, Metro Health and Beauty, says that one of the French firm’s competitors had to wait five years to receive NHS approval. As a recent entrant to the market, Laboratoires Expanscience sells its products instead over-the-counter in independent pharmacies, which limits its sales volumes.
Family-owned with annual revenues of €272m, Laboratoires Expanscience is an active exporter, with subsidiaries in 14 of the 85 countries in which it sells. More than half its total revenue comes from foreign sales. Although it has not applied for NHS approval, its Mustela products are widely available on prescription in other countries. Its Bébé 123 Vitamin Barrier Cream has been classified a drug in the US, meaning that it can be sold on prescription, as well as through retail chains such as Walgreen’s. Obtaining such approvals can be a long process, the firm has found; but the resulting increase in sales that such approval brings makes that investment worthwhile.
INTRICACIES OF VAT
Registering for reimbursement of value-added taxes (VAT) also presents a hurdle for many exporters, even within the EU single market. National VAT rates for the same product vary considerably across the EU: the standard rate varies widely, from 19% in Germany to 21% in the Netherlands and 24% in Greece. Moreover, some states impose ‘additional’ taxes on imported products, leading to variations in tax treatment even within the EU. Belgium taxes imported bottled water and fruit juices, for example, whereas neighbouring France does not. All this causes headaches for importers, who must comply with a patchwork of European tax rules.
At company level, the VAT quilt in Europe causes other types of problems. To receive reimbursement for VAT paid, a company must register with national authorities. The threshold for VAT registration varies widely among EU member states, from €10,000 in Portugal to £83,000 in the UK. One SME dealing with the VAT registration rules is Emois Gourmands, a UK start-up selling French gourmet food in London. Emois Gourmands founder and CEO Cecile Faure says that her firm buys directly from producers in France, does not use middlemen and does not add a big mark-up, thus enabling it to sell products at lower prices than UK supermarkets charge.
But Ms Faure says her firm’s small size puts it at a disadvantage in the VAT department. Her firm is not large enough to qualify for VAT registration in the UK. To avoid paying VAT on imports without being able to offset the tax payment through sales, Ms Faure has to hire a freight forwarder to make the upfront payment. Details such as this can make even a deep free-trade area such as the EU less free than intended. “I applied for VAT registration several times but was repeatedly tuned down,” says Ms Faure. “It’s expensive for a small company.”
UNRAVELLING CUSTOMS CLASSIFICATIONS
A further complication for SMEs is finding a way through the thicket of regulations governing customs clearance and customs classification. An export product’s customs classification is more than just a number: it is a unique identifying code which determines the product’s tariff and VAT treatment, if applicable, and whether the product is permitted to be sold in the destination country in the first place. Some defence-related products, for example, are subject to both export- and import-restrictions. In theory, the World Trade Organisation’s standard product classifications take all the mystery out of identifying products. In practice, it is not so simple, since the WTO’s guidelines can be applied inconsistently across countries. This causes problems for all types of companies, but SMEs, with their relatively limited resources, can be hit particularly hard.
Varying classification of the same product can appear even within a single market such as the EU, according to Christine Debats, international development manager at Conex, a small French company that handles customs clearance for importers and exporters. Television set-top boxes are classified according to their main function, for example. If this is deemed to be recording broadcasts, then imported boxes are subject to a tariff of 13.9%. If the main function is considered to be internet access, then the duty is 0%. The ambiguity comes when the box does both things— leading to a WTO ruling that the EU’s customs treatment of set-top boxes was out of compliance with its rules. That ruling, in turn, forced the EU to issue a complex set of new rules for classifying settop boxes. This example shows how standardised customs classifications sometimes do not keep up with the rapid pace of product development, making it hard to predict the customs treatment of some goods.
But modernising customs classification and clearance can bring pitfalls of its own. In May 2016 the European Commission introduced the Union Customs Code as part of an effort to modernise customs. The initiative aims to enable traders to file all customs declarations remotely by 2020. This will require joining together all of the disparate IT systems used by EU countries—a hugely ambitious undertaking involving a host of detailed changes to the customs treatment of products. This is a huge challenge, considering that “customs classifications change constantly,” says Ms Debats.
PATENT ‘PROTECTION’: ENTER THE TROLLS
Other official attempts to promote efficiency and reduce the paperwork burdens of exporters and investors within the EU are causing a different set of problems. The EU’s planned Unified Patent Court, which is expected to start operating this year, will enable pan-European patent protection via a single filing, thereby cutting the cost of filing patents in multiple national jurisdictions. However, the unified system will also increase the risk of facing patent infringement challenges all across the EU rather than in individual countries.
That risk is increasingly a reality for exporters to and within the EU, as a result of the appearance in Europe of so-called “patent trolls”. These are firms that acquire patents to technologies that they have no intention of developing themselves, for the purpose of blocking others from using the technology. The patent trolls prevent the use of those technologies by threatening firms developing those technologies with patent infringement lawsuits.
The practice originated in the US, where patent trolling has become a big business. Specialist patent trolls are joined by multinationals that actively buy and police patents in their sectors. A surge in patent litigation has led the federal government, as well as some US states, to clamp down on the trolls. One result of the US clamp-down “is that the patent trolls have come over to Europe,” says Edward Borovikov, a lawyer in France with global law firm Dentons.
So far, many of the problems have centred on Germany, where the courts support patentholders’ rights vigorously (as they do in the Netherlands), Mr Borovikov says. However, the pan- European patent system increases trolls’ potential rewards if they win a case, since compensation will be calculated across the entire EU and not only in the affected country. “A case will cost at least €200,000-300,000, which SMEs simply can’t afford,” says Mr Borovikov. “Twenty years ago, intellectual property was not a huge concern in Europe. Now companies must check very carefully for possible patent infringements to avoid being sued by trolls.”
Patent trolls are a particular threat to SMEs. In the US, half of all patent troll lawsuits are against companies with revenues of US$10 million or less. The average cost of defending such lawsuits is US$3.2m—enough to put many SMEs out of business, according to Snapdragon, a consultancy offering intellectual property protections.
Similar cases are emerging against European SMEs. Toll Collect, a mid-sized German company with 600 employees, was targeted recently by such a case. It holds a government contract for a road-pricing system for trucks in Germany, with some terminals placed in neighbouring countries including the Netherlands. Toll Collect was sued by a German firm, Papst, which owns a European patent for road-pricing systems. The case was filed in the Netherlands among other places, and a Dutch court found in Papst’s favour.
Staying clear of patent trolls is not, of course, the only issue for exporters wishing to protect their markets. In many parts of the world, the issue is far simpler: enforcing the IP protections already on the books. In China, for example, “the problem is not necessarily with the legislation, but with the implementation” of IP rights, says Christoph Kaiser, managing director in China for Turck Technology, a family-owned German industrial automation company with annual sales of around €500m. Similarly, Dutch biotech firm Keygene has yet to set up a full subsidiary in China because of IP concerns. CEO Arhen van Tunen believes that IP rights for products such as his—innovative crop improvements—are weak in China. The company holds more than 500 patents, but these are only as good as local enforcement of property rights.
FINDING A WAY
Such concerns keep giant emerging markets such as China and India out of reach for many European SMEs. So, for instance, although most large Dutch companies such as Philips and ABN Amro are well established in both countries, few SMEs have followed their example. Fewer than 200 Dutch firms operate in India. A 2016 survey of Dutch companies active in China, carried out by the Dutch Ministry of Foreign Affairs,4 found only about 1,000 Dutch companies in the country, out of a total of 871,000 Dutch companies, most of them SMEs. “The barriers to doing business mentioned most often concern government relations and the Chinese regulatory environment,” the Ministry says. “Bureaucracy and the lack of transparency in legislation are the most common hurdles.”
Opaque rules and inconsistent application of regulations governing health products, among others, along with customs classification issues and variable VAT rules even within a single market create day-to-day problems for all exporters. These problems are felt most keenly by firms new to exporting and short on resources for figuring out the details of the regulatory, legal and tax systems in each of its export markets. Free trade agreements, along with various initiatives to reduce the paperwork burdens on exporters and cross-border investors, can help. But occasionally well-intended efforts, such as the pan-European patent filing system and the remote customs-clearance initiative, have unintended consequences that actually can increase the burden on exporters. It remains for policy makers to improve on these efforts, to avoid having newly internationalising SMEs turn back from their efforts to venture abroad.
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SMEs and Global Growth: Meeting Logistics Challenges
A small or mid-sized enterprise (SME) establishing a presence in a new foreign market faces steep learning curves on several fronts. It must familiarise itself with the needs and preferences of a new market, ensure compliance with a new set of laws, find and train local staff, arrange financing, and sometimes learn a new language at the same time.
In the excitement of establishing a foothold in unfamiliar terrain, small firms can overlook a less glamorous aspect of the process, but one that is crucial to success: ensuring that components, raw materials and finished products reach their destinations on time, in good condition and at competitive prices. That task—establishing supply chains and distribution channels—falls to logistics managers; the quality of their performance can make the difference between a successful international expansion and an expensive disappointment.
Logistics pitfalls abound even in an SME’s home market, and can be compounded when using an overseas manufacturer. One typical example, involving underestimating shipping costs, is related by Entrepreneur magazine1, a North American publication focused on small business. A small California supplier of wedding-cake toppers, Younique Boutique, received an order to ship wedding toppers to a television production set. When the order ballooned unexpectedly to 280 toppers and the television production set was belatedly revealed to be in Hawaii, the SME’s founder and CEO scrambled to fill the order using a manufacturer in China. Under time pressure, and without accurate information on the shipment method to be used by the Chinese plant or the added price of a rush order, the owner guessed that the added shipping cost would be $5 per item—an underestimation that ultimately cost the firm $800.
HIRING DELIVERY EXPERTS
Mistakes made under time pressure are hard to avoid, but the main lesson here for SMEs is clear: Regardless of where they operate, attention to the nuts-and-bolts of logistics is an important aspect of successful entry into a new market.
To avoid costly logistical problems, many newly internationalising SMEs outsource the logistics function, both for inbound components and returns, and for outbound finished products. They look for experienced logistics services providers, using either partners they already employ elsewhere, or local firms, or a combination of the two. This enables them to concentrate on their core business and leaves the details of deliveries to firms with distribution expertise in the new market.
Consider UK-based Childrensalon, which sells high-end children’s clothing via its website and through a shop in Tunbridge Wells, UK. It increased its sales tenfold over the past five years (to £63 million in 2016) by selling internationally via its web site. This expansion required a heavy investment in logistics, including building up the firm’s packaging staff and warehousing capacity, as well as updating its IT systems. For deliveries, however, Childrensalon relies on five international freight firms including UPS and DHL. “We found that some companies were more efficient than others for deliveries in certain parts of the world,” says human resources director Denise Hamilton, adding that selecting providers for each new market was a process of “trial and error”. These outside providers manage the paperwork, such as customs clearance, as well as the actual deliveries.
Childrensalon is hardly alone in outsourcing freight services in new markets. Toby Gooley, editor of the US-based Supply Chain Quarterly, says that most companies, large and small, outsource distribution to avoid devoting time and resources to a non-core activity. While freight services provided by a third party come at a cost, outsourcing this function means an SME saves on dedicated staff to deliver goods and to ensure legal compliance with import and export regulations, as well as saving the direct costs of buying and maintaining delivery vehicles.
For a largely web-based company such as Childrensalon, outsourcing freight operations has allowed it to sell, and source, worldwide: it now offers more than 270 different brands and sells to more than 120 countries, fuelling rapid sales growth in recent years. Given that complexity, outsourcing freight operations was a must—even if that meant paying the costs of both initial deliveries to customers and return deliveries when customers do not want an item they ordered. The cost of return deliveries, in particular, cuts into the margins of an online retailer, but is an unavoidable cost since customers cannot physically see or try the goods they order online.
So, for example, Childrensalon pays freight services providers such as UPS or Fedex £9.95 per delivery to an address in the United States, and a similar amount if the customer decides to return the item. The firm pays freight providers £3.95 for delivery to a UK address. Ms Hamilton says that the higher US delivery charges are passed on to US customers (who must also pay return postage costs themselves), who pay them because the charges are relative low compared to the high cost of the high-end products involved. While this works for Childrensalon, high delivery costs in export markets could hurt companies in more competitive industry segments by pricing their products out of reach.
In general, experts say distribution and logistics services can add 10%-15% to the cost of goods.2 One concern highlighted by Childrensalon is that SMEs often fail to shop around extensively among alternative freight suppliers, even though the cost of freight services can dent competitiveness. Jim Edmondson, CEO of the UK aerospace company Gilo Industries, a privatelyheld group with 2016 revenues of £3.2 million, is one example among many. His company is about to expand from a specialised to a wider consumer market, but so far is relying on a single supplier, UPS.
Gilo makes a very lightweight engine which can be carried in a backpack to create a powered paraglider (avoiding many of the stringent regulations for conventional aircraft), among other applications. With sales of a few hundred units a year of products costing thousands of pounds apiece, logistics has not been a great concern. Gilo has hired UPS to deliver worldwide, and will pass delivery costs on to customers. This is a practical solution for the firm at a busy time. But with sales expected to increase to the thousands of units when the new product is launched, logistics costs may become more of a factor in the firm’s profitability.
KEEPING CORE LOGISTICS IN-HOUSE
While some firms outsource product deliveries, they also keep some mission-critical functions in-house. As noted above, for example, Childrensalon invested in a made-to-order IT system to manage dispatching of products from a warehouse in its home town. Due to the surge in sales and international deliveries that followed its online expansion, the firm recently added two warehouses on the same industrial estate. It also increased its packing and fulfilment staff to 90 people, nearly one-third of its total staff. Centralised distribution makes sense for a company selling to so many different markets: the cost of setting up warehouses abroad would have been prohibitive. More importantly, the in-house central warehousing function allows Childrensalon to retain direct control over a critical service—dispatching products as specified in customers’ orders—and to provide direct customer support when needed.
The use of Childrensalon employees to answer customer queries and provide comprehensive product information before purchase has paid off by keeping return rates very low, the firm says. According to Ms Hamilton, only around 10% of orders are returned. This compares to an estimated returns rate of 25% for women’s fashion items in the UK, according to an executive of retailer John Lewis.3 Cutting the rate of returns translates into an improved bottom line. The consultancy Clear Returns says that returned orders cost UK retailers £60 billion a year, a third of which is generated by online retailers.
Managing returns is particularly important for companies trading internationally, where the cost of deliveries from and to the home base are typically higher than for domestic deliveries. Raj Sandhan, managing director of UK distributor Metro Health and Beauty, experienced the difference first-hand when it sourced cosmetics in the US. He says that freight charges of 8-10% on US imports, on top of import tariffs, cut deeply into profit margins. “Together, freight and tariff charges can easily wipe out half of an exporter’s margins,” Sandhan says. Metro turned instead to cosmetics manufacturers in France to reduce both tariff and transport costs, and deals with suppliers there directly.
The heavy capital cost of setting up foreign logistics centres (such as warehouses) mean that companies expanding into new foreign markets generally outsource this function at first. They are more likely to invest in such centres when they are well established in the foreign market and therefore can predict demand, says Christopher Van Riet, managing director of Russian logistics provider Radius Group. Metro’s Sandhan agrees, saying that firms tend to use external distributors for the first two to three years in a foreign market.
Van Riet cites the example of John Deere, a large American agricultural machinery maker that started local assembly of its products to facilitate sales to Russian dealerships. Initially, it leased a turn-key assembly plant built by Radius, which bolted together a small number of components imported from the US. Over several years, John Deere built up its own manufacturing operation to take on more complex work; it also started to use more Russian suppliers of components. Although it needed to assemble locally to avoid Russian import tariffs, John Deere built up its manufacturing and logistics operations gradually, to avoid heavy upfront investment in an unproven market.
This approach is different from that of retailers, who—due to the fast-moving nature of their business—are more likely than heavy-goods manufacturers to see warehousing as mission-critical. “Retail stores can open and shut,” says Van Riet. “The key for supermarket chains is [control over] warehousing and distribution, so that they can maintain and deliver goods to stores reliably.”
For example, Auchan, the French supermarket chain, said in October 2016 that it will spend over US$100 million on a big logistics and distribution centre near Moscow. It used Radius to develop the project but has kept direct control over the facility. Initially, it will service Auchan’s existing 50 stores in the region. But with capacity to load and unload more than 200 trucks simultaneously,
the warehouse is expected to help with future expansion of the retailer’s store network in Russia. Like Childrensalon, Auchan regards control of warehousing and stock as too crucial to outsource.
Similarly, Ted Baker, a UK fashion brand with 2016 turnover of £456 million, plans to consolidate warehousing and distribution after a period of rapid international expansion. Previously, the firm used three separate distribution centres, which it combined into a single large warehousing and fulfilment centre in Derby, UK in May 2016. Centralising distribution into a single, highly automated, location open around the clock will save money, as well as giving it extra capacity to serve a growing international market, the firm says. On the other hand, in contrast to Auchan, which will manage its warehousing function with its own personnel, Ted Baker outsourced management of its new logistics centre to a logistics supplier. The provider not only bore the upfront cost of setting up the consolidated warehouse, but also provided the IT systems to manage inventories and deliveries.
Given the diversity of SME approaches to balancing in-house control and outsourcing of logistics functions, warehousing and logistics providers are offering increasingly sophisticated menus allowing SMEs to pick and choose the services they want. Some services involve only freightforwarding— organising shipments from the producer to the final customer or distributor. Others are broader, and might encompass, for example, managing online sales, arranging transport including documentation, and delivering goods to customers. The Royal Mail, the UK’s privatised postal services provider, has agreed on such a comprehensive system for Alibaba, the Chinese e-commerce web site. Under this arrangement, the Royal Mail will establish a sales web site for British firms selling via Alibaba, and will deliver the goods to UK customers.
Choosing a supplier requires research into each supplier’s specific expertise. Ms Gooley of Supply Chain Quarterly says that certain logistics providers specialise in particular industries, others have a certain geographic focus, and still others perform the whole gamut of logistics functions worldwide.
MIXING AND MATCHING
It remains for SMEs to decide on the best balance between controlling their own logistics and outsourcing some of those functions. Some creative mixing and matching of logistics functions— some in-house and some outsourced—may be required. Matt McInerney, vice president of global forwarding sales at the US third-party logistics provider C.H. Robinson, gives the example of an upmarket US kitchen equipment maker that wanted to expand into the UK. C.H. Robinson set up this company’s warehousing operations in the UK, sparing the client a heavy upfront expenditure. However, the kitchen equipment maker kept many operational functions in-house, for example running its own fleet of 18 trucks to deliver products to a network of more than 100 dealers.
The same principle—choosing what functions to outsource, and avoiding over-reliance on an external supplier—applies as well to outsourced manufacturing and product-assembly services. Supply chains begin with suppliers—of finished products or components or various functions such as freight services—and therein lies a risk for SMEs entering a foreign market. The risk is that an SME will over-rely on a crucial supplier that later fails, causing knock-on problems for the SME.
UK toy-maker Hornby, which had 2016 revenues of £56m and is best known for its model railways, found this out the hard way. The firm had largely relied since the 1990s on a single Chinese supplier of manufacturing services, Sanda Kan. After a series of ownership changes from 2000, the Chinese firm encountered financial difficulties and was bought by Kader Holdings (owner of one of Hornby’s main competitors, Bachmann) in 2009. From 2012, Hornby found that supplies of its products became erratic, with many containers arriving without needed products, as the supplier could not fulfil orders. That hit Hornby’s sales and its bottom line. Hornby paid £500,000 to sever its contract with the Chinese company. To avoid a repeat of the problem, and to diversify its supply chain and reduce risk, it replaced Sanda Kan with ten different Asian suppliers.
CONCLUSION: THE TECHNOLOGY ADVANTAGE
The cost of logistics—sometimes overlooked amidst the challenges of entering a new foreign market—can prove dangerous to an SME’s profit margin. Some SME’s take this risk in stride, choosing to work for thin margins as part of the cost of establishing their brands abroad. The lucky few with a unique market niche, such as Gilo Industries or Childrensalon, can keep margins healthy by passing freight costs on to customers. But whether margins are thin or not, SMEs must find the right balance between hiring outside experts to provide supply management and logistics services and performing these functions themselves in an unfamiliar new market.
The bigger picture related to the cost of logistics is that the logistics function itself is undergoing a profound change, as sellers of a wide range of goods shift from distribution through physical stores and warehouses to global sourcing and fulfilment of orders via e-commerce web sites. Added to this transformation are potentially revolutionary changes in the nature of transport, such as the use of delivery drones or self-driving delivery vehicles. These innovations all rely heavily on information technology; it follows that SMEs with sophisticated IT systems will have an edge in securing the best and most cost-effective logistics support.
As a first step, advances in communication technology can help SMEs both in researching potential logistics suppliers and managing providers once they are chosen. Information technology can also simplify logistics functions, and can aid SMEs in taking advantage of technological advances in distribution and delivery. Childrensalon’s web site, for example, streamlines the sales and fulfilment process, in part by detecting where a customer’s computer is located and automatically translating product data and pricing into the local language and currency.
But automation only goes so far; sometimes firms have to intervene manually to fill logistical gaps. “One of our staff once flew over to the US to deliver a very expensive dress on time,” when delivery otherwise would have been delayed by a holiday, recalls Childrensalon’s Denise Hamilton. That is a shoe-leather approach to logistics: doing whatever is necessary, including wearing out one’s shoes, to ensure that products reach their destination on time. It is the sort of thing that modern logistics, backed by sophisticated communication technology, is designed to avoid. “Many SMEs see distribution and logistics purely as a cost,” says Ms Gooley. “In fact it is an investment.”
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Aramco IPO a climate opportunity, but a race to the top hardly guaranteed
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US energy pricing, policy, security and emissions: next steps
Energy independence has been a stated, albeit ill-defined, goal of the United States since the Nixon administration. Recent developments in both the unconventional oil and gas and renewable energy industries have brought this goal closer than it has been in decades.
At 24% in 2015 [1], petroleum imports as a share of total national consumption are at their lowest since 1970 and Henry hub (the US benchmark for natural gas) prices are hovering around $2.8/Mbtu, down from $12 in June 2008. Meanwhile, the costs of utility-scale solar photovoltaic and onshore wind energy have dropped more than 60% and 40% respectively since 2008, and in recent years these sources have accounted for the majority of newly installed generation capacity in the United States.
That this has happened so fast is remarkable. In less than fifteen years, unconventional oil and gas production, mainly using hydraulic fracturing (“fracking”), rose from negligible to supplying around half of domestic production [2] [3].
This growth is a testament to the US economy’s ability to combine technological progress, flexible regulation and financial innovation to develop new opportunities. When, in 2014, OPEC decided to maintain production levels despite an oil-price crash, shale production was projected to stop abruptly. According to data from the Energy Information Agency (EIA), however, oil production continued to grow in the US for another six months, reaching record highs before it peaked. Various factors drove this counterintuitive dynamic.
First, rig efficiency has increased in many of the unconventional oil plays, as a result, in part, of producers focusing on their most productive plays. New-well oil production per rig in the Bakken region, for instance, has doubled since 2014 [4]. Along with a decline in the oil and gas rig count and a large drop in employment in the oil and gas sector, these efficiency gains have cut both labour and equipment costs, lowering the breakeven point. “People are trying to cut costs as much as they can, wherever they can. Even the accounting firms have been asked to halve their fees,” says Peter R. Hartley, an energy economics scholar at Rice University.
Another important lever has been to finance operations through debt. This, however, has reached daunting proportions. Onshore oil producers tracked by EIA, collectively accounting for 2.7m barrels per day of US production, spent 83% of their cash-flow revenues on debt repayments as of June 2015, the highest levels since 2011. Many companies have also engaged in asset write-downs. The 46 international and US upstream oil companies regularly tracked by the EIA, for instance, wrote down $38bn in Q3 2015 alone — the largest write-down since 2008. While no one wants to sell at low valuations, consolidation becomes more likely the longer the oil price remains low.
On the whole, however, the geostrategic energy situation for the United States remains quite positive. As Mr Hartley highlights, “The fact the oil price is down is less a result of investments in America than it is a decision of OPEC to keep the tap open.” However, he notes, “the much greater flexibility of unconventional production — and the large amount of resources available — means the US supply response is now much more elastic. And that reduces OPEC’s monopoly power over oil prices."
These advantages in terms of energy security are even more pronounced for natural gas, a commodity for which a single global price does not exist. Since 2006, lasting spreads have favoured the US Henry hub benchmarks versus the price of natural gas in Europe or Japan. Sustained low prices have created competitive gains for industries relying on natural gas as feedstock, with the petrochemicals industry an obvious long-term winner, although a low oil price also limits the gains from the ethane-naphtha spread. The metals industry should also benefit. Steelmaking in the US, for instance, has seen resurgence in the use of direct reduced iron (DRI), with US DRI output potentially reaching up to 10m tonnes by 2020 from just 1.3m in 2013. Cheap natural gas is also saving consumers money on their heating and electricity bills. According to an evaluation by Harvard Business School, these savings totalled $800 per average US household in 2014. While some of that will be saved, the rest will result in increased consumer spending, thus benefitting the economy.
Energy abundance is an opportunity, not an excuse
One of the most crucial questions facing the US in the future is how newly abundant fossil fuel resources will affect the trajectory of the country’s carbon emissions. Left unchecked, climate change could leave critical parts of the US housing stock and infrastructure exposed to climate-induced sea level rise as well as more frequent and stronger extreme weather events such as hurricanes or droughts. Such events already cost the US tens of billions of dollars a year in damaged property, other economic harms and health consequences. Climate change could also impact the power generation infrastructure due to higher temperatures and reduced water availability, according to the Department of Energy (DOE). “In the absence of concerted action to improve resilience, energy system vulnerabilities pose a threat to America’s national security, energy security, economic wellbeing, and quality of life,” warns a DOE report published in 2015 evaluating the vulnerability of the US energy sector to climate change. It is in the US’s long-term interest to address the climate problem today.
Under the United Nations climate accord agreed to in December 2015, the US has also pledged to take action on climate change. The agreement, signed in Paris by more than 190 countries, recognises the need to achieve “global peaking of greenhouse gas emissions as soon as possible” to keep temperature increases below 2°C by the end of the century. By ratifying the agreement and issuing the Clean Power Plan (CPP), the US’ first policy to explicitly target carbon emissions from the power sector at the national level, the country has taken a step in the right direction. But the US can and should do more.
The need for a clear, coherent and long-term signal
A successful transition requires policy and price signals that are clear, long-term, and strong enough to shift investments towards low-carbon infrastructure. These signals are critical to achieving a low-carbon future for two primary reasons. First, free-market competition requires a level playing field, including a firm price on carbon emissions to account for their negative externalities. Second, for markets to adjust in a non-disruptive manner the price should be gradually more stringent, thus enabling the private sector to shift gradually towards a low-carbon economy.
Until recently, the pattern of US governance in the energy sector had been driven mostly by short-term opportunism rather than a pro-active redesign of the US’s infrastructure base. The production tax credit (PTC) for onshore wind, which provides tax credits per unit of electricity generated for a period of 10 years, had been notoriously hard to predict, for instance, leading to surges in instalments in the quarter preceding possible renewal as companies pushed projects forward in a race to completion prior to the PTC’s expiry. Last-minute policy uncertainty, of course, is not the best way to promote long-term investment in enduring, capital-intensive infrastructure.
The US seems to have learned this lesson. In December 2015, the PTC and the Investment Tax Credit – PTC’s solar equivalent – were both extended for a duration of five years. The impact of this longer-term signal is substantial: the extension is expected to bring an additional 19GW of wind and 18GW of solar online over the next five years respectively, according to analysis by Bloomberg New Energy Finance [5].
As for pricing carbon, the US has limited, regional markets, covering a mere 10% of the country’s total emissions. Although California’s cap-and-trade programme currently boasts the highest price in the US (~13$/tCO2e as of Sept 2016) and is close to the $20/tCO2e the International Energy Agency (IEA) estimates the US will have to apply to its power sector by 2020 to keep its emissions compatible with a 2°C scenario, the current carbon price is still far from the $100/tCO2e the IEA assumes will be needed in the US by 2030.
Despite this suboptimal policy context, the US has done relatively well in reducing emissions cost-effectively. As of 2015, it had the second-largest installed base of non-hydro renewables in the world and was the second largest country in terms of investments, albeit well below those of China, which has been ahead of the US on both accounts since 2011. As for coal, the US has gradually replaced it with renewables and natural gas, with the latter accounting for around 35% of total electricity production in the second quarter of 2016 — up from just 17% in 2001. However, coal’s current displacement is not a result of carbon policies but rather a consequence of low-cost natural gas and regulations aimed at local — not global — pollution.
“Given the current set of regulations in the US to mitigate carbon emissions, it is difficult to say with confidence how effective the combination of these policies is going to be,” says Justin Gundlach, climate-change fellow at the Sabin Center for Climate Change Law at Columbia Law School. The problem of policy coherence is hardly exclusive to America, but it does hinder the US’s ability to realign its energy system to meet the country’s long-term economic and environmental needs.
One positive development in that regard is the CPP. A key feature of the CPP, according to Mr Gundlach, is that it forces states to tackle the issue of policy coherence in a transparent and coordinated way, which facilitates implementation and reduces compliance costs. Another advantage of the CPP is that it opens up the possibility for carbon emissions trading between participating states. Under the proposed plan, currently under review by the U.S. Court of Appeals for the D.C. Circuit, states are allowed to choose between a rate-based goal, set in tCO2e/MWh — effectively a performance standard for carbon intensity— or a mass-based goal, with a cap on total tons of CO2 equivalent. Under the latter option, states would then “readily qualify to trade with affected electricity generating units in states that adopt the same approach”.
Leading by example
Beyond increasing policy coherence, both state and federal governments can open up new markets through public procurement strategies. A clear example of that is the role the public sector has played in expanding the market for energy service companies in the buildings sector — over a fifth of the total floorspace in the US is owned by federal, state, or local governments. Government mandates and purchasing decisions have helped improve energy efficiency through procurement and fostered a broader private-sector market.
Not every state is active in promoting sustainability, however. California has led in energy efficiency initiatives for decades while states like New York or Connecticut have established green investment banks dedicated to promoting clean-energy investments in the state. By contrast, other states such as North Dakota or Wyoming still lack even a mandatory building energy code at the state level. [6]
Another important role for government will be fostering innovation. The government can help expand R&D efforts to help lower the cost of technologies currently in labs. The country’s announced goal to double clean-energy R&D spending, along with 19 other nations leading in clean energy R&D, is an important step in that direction. Should the US reach that objective, clean-energy R&D levels in the US would roughly double from ~$5bn today to some $10bn by 2020.
Complementing this R&D push will be ‘demand pull’ efforts such as policies that create new markets for technologies that are nearing commercialization. California’s 2013 mandate to install 1.3GW of storage by 2020, for instance, has helped utilities diversify their energy-storage technology portfolios while fostering an environment for technologies to compete, from utility-scale solutions to decentralized ones. The reason, says Nancy Pfund, managing partner at DBL Investors, is that “these policies de-risk it for investors, it’s not a pilot to nowhere”. One of the technologies enabled by the mandate, and in which DBL has invested, is Advanced Microgrid Solutions, a startup that managed to secure a 50MW storage contract in 2014 with one of California’s utilities. “That’s unheard of for a start-up company,” notes Pfund.
A critical time for climate action
By explicitly stating the goal of keeping temperature increases “well below 2°C”, the Paris agreement is a clear signal of the international community’s resolve to combat climate change. Current pledges are far from meeting that goal, however, and the agreement emphasises the urgent need to address the significant gap between the countries’ mitigation pledges and the aggregate emission pathways actually necessary to hold the increase in global average temperature well below 2°C. With that in mind, a key element of the Paris agreement is the commitment to review climate pledges every 5 years to increase ambitions based on policy progress and technological developments.
On 5 October 2016, the threshold for operationalization of the Paris Agreement (55 countries representing at least 55% of global emissions) was achieved, meaning the agreement will enter into force on 4 November 2016.
The next five years will thus be crucial for climate action. Acting now will not be free: under existing US policies, including the CPP, some $2.19trn worth of investments will be required over the next 25 years in the US power sector alone, with some 39% going to transmission and distribution (T&D) infrastructure, followed by renewables (37%), fossil-fuel power generation (13%) and nuclear (11%). Acting later will cost even more, as abatement costs and the value of US assets exposed to climate-change risks will rise over time. In such a context, it is of grave concern that new US president Donald Trump rejects the overwhelming scientific evidence of climate change [7] [8].
Low energy prices represent a unique opportunity to reduce carbon emissions. As Mark Brownstein, vice president of the climate and energy program at the Environmental Defense Fund, notes, “The decline in natural gas price is creating economic headroom to ramp up investment in electric transmission and distribution infrastructure with minimal impact on the customer’s total monthly energy bill”. This is because, from an end-user point of view, the increased costs associated with the investment in T&D are offset by the lower costs of electricity generation thanks to cheap natural gas.
How to spend that low gas price dividend matters, says Brownstein. Avoiding lock-in to a carbon-intensive infrastructure will be critical, he notes. In fact, as Mr Gundlach warns, "Integrating means changing the electric system. Natural gas provides an easy way around that in the short-term. It does not, however, constitute a long-term solution to the decarbonisation of the electricity sector.”
Similar considerations apply to the natural-gas distribution side. States will thus have to carefully evaluate the costs and benefits of building new pipelines to feed rising demand from the power sector against those of investing in clean-power generation and demand-side responses to reduce the demand for natural gas in the first place — and thus avoid the need for pipeline investments.
America’s opportunity to shine
The next administration faces a unique responsibility to position the United States on a path towards a low-carbon future. Success will require leveraging the benefits of the switch away from coal while avoiding a permanent lock-in to fossil-fuel-dependent infrastructure. This will be a difficult yet crucial balance to strike. The good news is that, thanks to cheap energy, the US is in a uniquely favourable position to act. Achieving a clean energy transition will not only be good for the US economy, it will also help consolidate US leadership on the international fight against climate change. The Paris agreement on climate change is a clear signal that the world is ready to act on the issue. It’s time for America to rise to the challenge.
_____________________________________________________________
FOOTNOTES:
1 http://www.eia.gov/tools/faqs/faq.cfm?id=32&t=6
2 https://www.eia.gov/tools/faqs/faq.cfm?id=847&t=6
3 https://www.eia.gov/tools/faqs/faq.cfm?id=847&t=6
4 https://www.eia.gov/petroleum/drilling/pdf/dpr-full.pdf #page=3
5 http://www.bbhub.io/bnef/sites/4/2016/04/BNEF-Summit-Keynote-2016.pdf
6 http://database.aceee.org/state/public-building-requirements
[7] http://www.scientificamerican.com/article/trump-picks-top-climate-skepti...
[8] http://fortune.com/2016/10/01/trump-paris-climate-agreement/
Driving energy efficiency: A comparison of five mature markets
The study focuses on the following areas:
The main types of strategies for encouraging energy savings How information campaigns and incentives can be tailored to specific audiences The role played by product labelling and standard-setting for energy efficiency An assessment of what strategies work best in encouraging efficiencyKey findings:
Conservation initiatives can be grouped into three broad categories: raising awareness, tightening technical standards for buildings and energy-using products, and offering incentives to cut energy use. Ownership of buildings determines the strategy for saving energy. For owner-occupied buildings, investments in efficiency pay back over time in lower energy bills. In rented housing and workplaces, a gains-sharing approach, in which owners as well as tenants benefit from efficiency investments, work best. Raising awareness I: Tailoring the message to the audience is important. Some respond best to appeals based on environmental protection, while others care most about financial incentives and returns. Raising awareness II: Choosing a trusted messenger is also key to successful awareness campaigns. For example in the US, regulated utilities tend to be trusted sources, whereas in the UK, privatised energy companies encountered resistance to their conservation messages. Setting standards and applying labels: Product-labelling schemes that rate the efficiency of buildings or homes have proven effective tools for cutting energy use. An example is the US ‘Energy Star’ programme. Incentives count: Various government incentive programmes, as well as private-sector gains-sharing schemes, have proven effective in promoting energy efficiency. Avoiding the ‘rebound effect’: While investment in efficiency lowers energy bills, governments should guard against the “rebound effect”, in which consumers—encouraged by the greater efficiency—buy more appliances and devices and thereby end up using more energy, not less.
Power Up: Delivering renewable energy in Africa
Following high-level declarations at the Sustainable Development Goals and the Paris Climate Conference in late 2015, there is a growing appetite for renewable energy in Africa. This is much-needed; the continent’s energy supplies are not meeting the needs and aspirations of its people. A better system will promote economic diversification, raise productivity, and improve the health and wellbeing of citizens. Africa requires between $60 and $90 billion annually to address its energy shortfall, roughly quadruple 2014 investment levels.
While fossil fuels, notably coal, oil and gas, continue to provide a significant quantity of energy - especially in South Africa - renewables need to play a greater role. Africa has plentiful resources, from geothermal power in Kenya and Ethiopia to hydropower in Zambia and the Democratic Republic of Congo. Solar and wind are especially promising, thanks to falling costs and resource abundance. From solar-powered hospitals in Lagos to wind farms in Lake Turkana, renewable energy is not just a pipe dream - it is a reality. Renewables can increase energy security, reduce energy import bills, and diversify and de-risk the energy mix. Through off-grid technologies, they can provide direct, affordable power to rural regions beyond the reach of the grid system.
But to harness renewables at scale, very significant infrastructure is needed: both core assets like wind and solar farms1 and transmission grids, as well as connective infrastructures, like roads to and from sites for transporting kit and manpower, or for bringing products, like solar-powered mobile phones, to market. This requires effective regulation, sufficient financing, appropriate technologies and smart business models. The ambitions are there.
The African Renewable Energy Initiative, led by institutions including the African Union and the United Nations Environment Programme, has set a goal of 300 GW of renewable energy capacity by 2030. But this requires a 680% increase in current deployment rates. According to IRENA’s latest data, the installed renewable power generation capacity in Sub-Saharan Africa currently stands slightly below 30 GW, roughly 25-30% of the installed power base, but this is dominated by large hydro, with other renewables collectively accounting for just 4-5% of power generation. Can the investment be achieved? Who are the current players and how is the market evolving?
This report, combining country fieldwork and 28 expert interviews, looks at the current renewable power capacity on the continent, identifies the market leaders and looks at the key enablers and constraints.
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These pressures, along with a greater focus on patient-centred care, have raised the profile of VBHC, especially in European healthcare systems. Sweden, with its highly comprehensive and egalitarian healthcare system, has been a leader in implementing VBHC from the beginning, a fact that was underscored in a 2016 global assessment of VBHC published by The Economist Intelligence Unit.
This paper looks at the ways in which Sweden has implemented VBHC, the areas in which it has faced obstacles and the lessons that it can teach other countries and health systems looking to improve the value of their own healthcare investments.
Breast cancer patients and survivors in the Asia-Pacific workforce
With more older women also working, how will the rising trend of breast cancer survivorship manifest in workplace policies, practices and culture? What challenges do breast cancer survivors face when trying to reintegrate into the workforce, or to continue working during treatment? How can governments, companies and society at large play a constructive role?
This series of reports looks at the situation for breast cancer survivors in Australia, New Zealand and South Korea. It finds that while progress has been made, more needs to be done, particularly in South Korea, where public stigma around cancer remains high. The Cost of Silence
Cardiovascular diseases levy a substantial financial toll on individuals, their households and the public finances. These include the costs of hospital treatment, long-term disease management and recurring incidence of heart attacks and stroke. They also include the costs of functional impairment and knock-on costs as families may lose breadwinners or have to withdraw other family members from the workforce to care for a CVD patient. Governments also lose tax revenue due to early retirement and mortality, and can be forced to reallocate public finances from other budgets to maintain an accessible healthcare system in the face of rising costs.
As such, there is a need for more awareness of the ways in which people should actively work to reduce their CVD risk. There is also a need for more primary and secondary preventative support from health agencies, policymakers and nongovernmental groups.
To inform the decisions and strategies of these stakeholders, The Economist Intelligence Unit and EIU Healthcare, its healthcare subsidiary, have conducted a study of the prevalence and costs of the top four modifiable risk factors that contribute to CVDs across the Asian markets of China, Australia, Hong Kong, Japan, Singapore, South Korea, Taiwan and Thailand.
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Accelerating urban intelligence: People, business and the cities of tomorro...
About the research
Accelerating urban intelligence: People, business and the cities of tomorrow is an Economist Intelligence Unit report, sponsored by Nutanix. It explores expectations of citizens and businesses for smart-city development in some of the world’s major urban centres. The analysis is based on two parallel surveys conducted in 19 cities: one of 6,746 residents and another of 969 business executives. The cities included are Amsterdam, Copenhagen, Dubai, Frankfurt, Hong Kong, Johannesburg, London, Los Angeles, Mumbai, New York, Paris, Riyadh, San Francisco, São Paulo, Singapore, Stockholm, Sydney, Tokyo and Zurich.
Respondents to the citizen survey were evenly balanced by age (roughly one-third in each of the 18-38, 39-54 and 55 years and older age groups) and gender. A majority (56%) had household incomes above the median level in their city, with 44% below it. Respondents to the business survey were mainly senior executives (65% at C-suite or director level) working in a range of different functions. They work in large, midsize and small firms in over a dozen industries. See the report appendix for full survey results and demographics.
Additional insights were obtained from indepth interviews with city officials, smart-city experts at NGOs and other institutions, and business executives. We would like to thank the following individuals for their time and insights.
Pascual Berrone, academic co-director, Cities in Motion, and professor, strategic management, IESE Business School (Barcelona) Lawrence Boya, director, Smart City Programme, city of Johannesburg Amanda Daflos, chief innovation officer, city of Los Angeles Linda Gerull, chief information officer, city of San Francisco Praveen Pardeshi, municipal commissioner, Brihanmumbai Municipal Corporation (Mumbai) • Brian Roberts, policy analyst, city of San Francisco Sameer Sharma, global general manager, Internet of Things (IoT), Intel • Marius Sylvestersen, programme director, Copenhagen Solutions Lab Tan Kok Yam, deputy secretary of the Smart Nation and Digital Government, Prime Minister’s Office, SingaporeThe report was written by Denis McCauley and edited by Michael Gold.
Talent for innovation
Talent for innovation: Getting noticed in a global market incorporates case studies of the 34 companies selected as Technology Pioneers in biotechnology/health, energy/environmental technology, and information technology.
Leonardo Da Vinci unquestionably had it in the 15th century; so did Thomas Edison in the 19th century. But today, "talent for innovation" means something rather different. Innovation is no longer the work of one individual toiling in a workshop. In today's globalised, interconnected world, innovation is the work of teams, often based in particular innovation hotspots, and often collaborating with partners, suppliers and customers both nearby and in other countries.
Innovation has become a global activity as it has become easier for ideas and talented people to move from one country to another. This has both quickened the pace of technological development and presented many new opportunities, as creative individuals have become increasingly prized and there has been greater recognition of new sources of talent, beyond the traditional innovation hotspots of the developed world.
The result is a global exchange of ideas, and a global market for innovation talent. Along with growth in international trade and foreign direct investment, the mobility of talent is one of the hallmarks of modern globalisation. Talented innovators are regarded by companies, universities and governments as a vital resource, as precious as oil or water. They are sought after for the simple reason that innovation in products and services is generally agreed to be a large component, if not the largest component, in driving economic growth. It should be noted that "innovation" in this context does not simply mean the development of new, cutting-edge technologies by researchers.
It also includes the creative ways in which other people then refine, repackage and combine those technologies and bring them to market. Indeed, in his recent book, "The Venturesome Economy", Amar Bhidé, professor of business at Columbia University, argues that such "orchestration" of innovation can actually be more important in driving economic activity than pure research. "In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential," he writes. Ideas cross borders not just in the form of research papers, e-mails and web pages, but also inside the heads of talented people. This movement of talent is not simply driven by financial incentives. Individuals may also be motivated by a desire for greater academic freedom, better access to research facilities and funding, or the opportunity to work with key researchers in a particular field.
Countries that can attract talented individuals can benefit from more rapid economic growth, closer collaboration with the countries where those individuals originated, and the likelihood that immigrant entrepreneurs will set up new companies and create jobs. Mobility of talent helps to link companies to sources of foreign innovation and research expertise, to the benefit of both. Workers who emigrate to another country may bring valuable knowledge of their home markets with them, which can subsequently help companies in the destination country to enter those markets more easily. Analysis of scientific journals suggests that international co-authorship is increasing, and there is some evidence thatcollaborative work has a greater impact than work carried out in one country. Skilled individuals also act as repositories of knowledge, training the next generation and passing on their accumulated wisdom.
But the picture is complicated by a number of concerns. In developed countries which have historically depended to a large extent on foreign talent (such as the United States), there is anxiety that it is becoming increasingly difficult to attract talent as new opportunities arise elsewhere. Compared with the situation a decade ago, Indian software engineers, for example, may be more inclined to set up a company in India, rather than moving to America to work for a software company there. In developed countries that have not historically relied on foreign talent (such as Germany), meanwhile, the ageing of the population as the birth rate falls and life expectancy increases means there is a need to widen the supply of talent, as skilled workers leave the workforce and young people show less interest than they used to in technical subjects. And in developing countries, where there is a huge supply of new talent (hundreds of thousands of engineers graduate from Indian and Chinese universities every year), the worry is that these graduates have a broad technical grounding but may lack the specialised skills demanded by particular industries.
Other shifts are also under way. The increasing sophistication of emerging economies (notably India and China) is overturning the old model of "create in the West, customise for the East". Indian and Chinese companies are now globally competitive in many industries. And although the mobility of talent is increasing, workers who move to another country are less likely to stay for the long-term, and are more likely to return to their country of origin. The number of Chinese students studying abroad increased from 125,000 in 2002 to 134,000 in 2006, for example, but the proportion who stayed in the country where they studied after graduating fell from 85% to 69% over the same period, according to figures from the OECD (see page 10).
What is clear is that the emergence of a global market for talent means gifted innovators are more likely to be able to succeed, and new and unexpected opportunities are being exploited, as this year's Technology Pioneers demonstrate. They highlight three important aspects of the global market for talent: the benefits of mobility, the significant role of diasporas, and the importance of network effects in catalysing innovation.
Brain drain, or gain?
Perhaps the most familiar aspect of the debate about flows of talent is the widely expressed concern about the "brain drain" from countries that supply talented workers. If a country educates workers at the taxpayers' expense, does it not have a claim on their talent? There are also worries that the loss of skilled workers can hamper institutional development and drive up the cost of technical services. But such concerns must be weighed against the benefits of greater mobility.
There are not always opportunities for skilled individuals in their country of birth. The prospect of emigration can encourage the development of skills by individuals who may not in fact decide to emigrate. Workers who emigrate may send remittances back to their families at home, which can be a significant source of income and can help to alleviate poverty. And skilled workers may return to their home countries after a period working abroad, further stimulating knowledge transfer and improving the prospects for domestic growth, since they will maintain contacts with researchers overseas. As a result, argues a recent report from the OECD, it makes more sense to talk of a complex process of "brain circulation" rather than a one-way "brain drain". The movement of talent is not simply a zero-sum gain in which sending countries lose, and receiving countries benefit. Greater availability and mobility of talent opens up new possibilities and can benefit everyone.
Consider, for example, BioMedica Diagnostics of Windsor, Nova Scotia. The company makes medical diagnostic systems, some of them battery-operated, that can be used to provide health care in remote regions to people who would otherwise lack access to it. It was founded by Abdullah Kirumira, a Ugandan biochemist who moved to Canada in 1990 and became a professor at Acadia University. There he developed a rapid test for HIV in conjunction with one of his students, Hermes Chan (a native of Hong Kong who had moved to Canada to study). According to the United States Centers for Disease Control, around one-third of people tested for HIV do not return to get the result when it takes days or weeks to determine. Dr Kirumira and Dr Chan developed a new test that provides the result in three minutes, so that a diagnosis can be made on the spot. Dr Kirumira is a prolific inventor who went on to found several companies, and has been described as "the pioneer of Nova Scotia's biotechnology sector".
Today BioMedica makes a range of diagnostic products that are portable, affordable and robust, making them ideally suited for use in developing countries. They allow people to be rapidly screened for a range of conditions, including HIV, hepatitis, malaria, rubella, typhoid and cholera. The firm's customers include the World Health Organisation. Providing such tests to patients in the developing world is a personal mission of Dr Kirumira's, but it also makes sound business sense: the market for invitro diagnostics in the developing world is growing by over 25% a year, the company notes, compared with growth of only 5% a year in developed nations.
Moving to Canada gave Dr Kirumira research opportunities and access to venture funding that were not available in Uganda. His innovations now provide an affordable way for hospitals in his native continent of Africa to perform vital tests. A similar example is provided by mPedigree, a start-up that has developed a mobile-phone-based system that allows people to verify the authenticity of medicines. Counterfeit drugs are widespread in the developing world: they are estimated to account for 10-25% of all drugs sold, and over 80% in some countries. The World Health Organisation estimates that a fake vaccine for meningitis, distributed in Niger in 1995, killed over 2,500 people. mPedigree was established by Bright Simons, a Ghanaian social entrepreneur, in conjunction with Ashifi Gogo, a fellow Ghanaian. The two were more than just acquaintances having met at Secondary School. There are many high-tech authentication systems available in the developed world for drug packaging, involving radio-frequency identification (RFID) chips, DNA tags, and so forth.
The mPedigree system developed my Mr Gogo, an engineering student, is much cheaper and simpler and only requires the use of a mobile phone — an item that is now spreading more quickly in Africa than in any other region of the world. Once the drugs have been purchased, a panel on the label is scratched off to reveal a special code. The patient then sends this code, by text message, to a particular number. The code is looked up in a database and a message is sent back specifying whether the drugs are genuine. The system is free to use because the drug companies cover the cost of the text messages. It was launched in Ghana in 2007, and mPedigree's founders hope to extend it to all 48 sub-Saharan African countries within a decade, and to other parts of in the developing world.
The effort is being supported by Ghana's Food and Drug Board, and by local telecoms operators and drug manufacturers. Mr Gogo has now been admitted into a special progamme at Dartmouth College in the United States that develops entrepreneurial skills, in addition to technical skills, in engineers. Like Dr Kirumira, he is benefiting from opportunities that did not exist in his home country, and his country is benefiting too. This case of mPedigree shows that it is wrong to assume that the movement of talent is one-way (from poor to rich countries) and permanent. As it has become easier to travel and communications technology has improved, skilled workers have become more likely to spend brief spells in other countries that provide opportunities, rather than emigrating permanently.
And many entrepreneurs and innovators shuttle between two or more places — between Tel Aviv and Silicon Valley, for example, or Silicon Valley and Hsinchu in Taiwan — in a pattern of "circular" migration, in which it is no longer meaningful to distinguish between "sending" and "receiving" countries.
The benefits of a diaspora
Migration (whether temporary, permanent or circular) to a foreign country can be facilitated by the existence of a diaspora, since it can be easier to adjust to a new culture when you are surrounded by compatriots who have already done so. Some observers worry that diasporas make migration too easy, in the sense that they may encourage a larger number of talented individuals to leave their home country than would otherwise be the case, to the detriment of that country.
But as with the broader debate about migration, this turns out to be only part of the story. Diasporas can have a powerful positive effect in promoting innovation and benefiting the home country. Large American technology firms, for example, have set up research centres in India in part because they have been impressed by the calibre of the migrant Indian engineers they have employed in America. Diasporas also provide a channel for knowledge and skills to pass back to the home country.
James Nakagawa, a Canadian of Japanese origin and the founder of Mobile Healthcare, is a case in point. A third-generation immigrant, he grew up in Canada but decided in 1994 to move to Japan, where he worked for a number of technology firms and set up his own financial-services consultancy. In 2000 he had the idea that led him to found Mobile Healthcare, when a friend was diagnosed with diabetes and lamented that he found it difficult to determine which foods to eat, and which to avoid.
The rapid spread of advanced mobile phones in Japan, a world leader in mobile telecoms, prompted Mr Nakagawa to devise Lifewatcher, Mobile Healthcare's main product. It is a "disease selfmanagement system" used in conjunction with a doctor, based around a secure online database that can be accessed via a mobile phone. Patients record what medicines they are taking and what food they are eating, taking a picture of each meal. A database of common foodstuffs, including menu items from restaurants and fast-food chains, helps users work out what they can safely eat. Patients can also call up their medical records to follow the progress of key health indicators, such as blood sugar, blood pressure, cholesterol levels and calorie intake.
All of this information can also be accessed online by the patient's doctor or nutritionist. The system allows people with diabetes or obesity (both of which are rapidly becoming more prevalent in Japan and elsewhere) to take an active role in managing their conditions. Mr Nakagawa did three months of research in the United States and Canada while developing Lifewatcher, which was created with support from Apple (which helped with hardware and software), the Japanese Red Cross and Japan's Ministry of Health and Welfare (which provided full access to its nutritional database).
Japanese patients who are enrolled in the system have 70% of the cost covered by their health insurance. Mr Nakagawa is now working to introduce Lifewatcher in the United States and Canada, where obesity and diabetes are also becoming more widespread — along advanced mobile phones of the kind once only found in Japan. Mr Nakagawa's ability to move freely between Japanese and North American cultures, combining the telecoms expertise of the former with the entrepreneurial approach of the latter, has resulted in a system that can benefit both.
The story of Calvin Chin, the Chinese-American founder of Qifang, is similar. Mr Chin was born and educated in America, and worked in the financial services and technology industries for several years before moving to China. Expatriate Chinese who return to the country, enticed by opportunities in its fast-growing economy, are known as "returning turtles". Qifang is a "peer to peer" (P2P) lending site that enables students to borrow money to finance their education from other users of the site. P2P lending has been pioneered in other countries by sites such as Zopa and Prosper in other countries.
Such sites require would-be borrowers to provide a range of personal details about themselves to reassure lenders, and perform credit checks on them. Borrowers pay above-market rates, which is what attracts lenders. Qifang adds several twists to this formula. It is concentrating solely on student loans, which means that regulators are more likely to look favourably on the company's unusual business model. It allows payments to be made directly to educational institutions, to make sure the money goes to the right place. Qifang also requires borrowers to give their parents' names when taking out a loan, which increases the social pressure on them not to default, since that would cause the family to lose face.
Mr Chin has thus tuned an existing business model to take account of the cultural and regulatory environment in China, where P2P lending could be particularly attractive, given the relatively undeveloped state of China's financial-services market. In a sense, Qifang is just an updated, online version of the community group-lending schemes that are commonly used to finance education in China. The company's motto is that "everyone should be able to get an education, no matter their financial means".
Just as Mr Chin is trying to use knowledge acquired in the developed world to help people in his mother country of China, Sachin Duggal hopes his company, Nivio, will do something similar for people in India. Mr Duggal was born in Britain and is of Indian extraction. He worked in financial services, including a stint as a technologist at Deutsche Bank, before setting up Nivio, which essentially provides a PC desktop, personalised with a user's software and documents, that can be accessed from any web browser.
This approach makes it possible to centralise the management of PCs in a large company, and is already popular in the business world. But Mr Duggal hopes that it will also make computing more accessible to people who find the prospect of owning and managing their own PCs (and dealing with spam and viruses) too daunting, or simply cannot afford a PC at all. Nivio's software was developed in India, where Mr Duggal teamed up with Iqbal Gandham, the founder of Net4India, one of India's first internet service providers. Mr Duggal believes that the "virtual webtop" model could have great potential in extending access to computers to rural parts of India, and thus spreading the opportunities associated with the country's high-tech boom. A survey of the bosses of Indian software firms clearly shows how diasporas can promote innovation.
It found that those bosses who had lived abroad and returned to India made far more use of diaspora links upon their return than entrepreneurs who had never lived abroad, which gave them access to capital and skills in other countries. Diasporas can, in other words, help to ensure that "brain drain" does indeed turn into "brain gain", provided the government of the country in question puts appropriate policies in place to facilitate the movement of people, technology and capital.
Making the connection
Multinational companies can also play an important role in providing new opportunities for talented individuals, and facilitating the transfer of skills. In recent years many technology companies have set up large operations in India, for example, in order to benefit from the availability of talented engineers and the services provided by local companies. Is this simply exploitation of low-paid workers by Western companies?
The example of JiGrahak Mobility Solutions, a start-up based in Bangalore, illustrates why it is not. The company was founded by Sourabh Jain, an engineering graduate from the Delhi Institute of Technology. After completing his studies he went to work for the Indian research arm of Lucent Technologies, an American telecoms-equipment firm. This gave him a solid grounding in mobile-phone technology, which subsequently enabled him to set up JiGrahak, a company that provides a mobile-commerce service called Ngpay.
In India, where many people first experience the internet on a mobile phone, rather than a PC, and where mobile phones are far more widespread than PCs, there is much potential for phone-based shopping and payment services. Ngpay lets users buy tickets, pay bills and transfer money using their handsets. Such is its popularity that with months of its launch in 2008, Ngpay accounted for 4% of ticket sales at Fame, an Indian cinema chain.
The role of large companies in nurturing talented individuals, who then leave to set up their own companies, is widely understood in Silicon Valley. Start-ups are often founded by alumni from Sun, HP, Oracle and other big names. Rather than worrying that they could be raising their own future competitors, large companies understand that the resulting dynamic, innovative environment benefits everyone, as large firms spawn, compete with and acquire smaller ones.
As large firms establish outposts in developing countries, such catalysis of innovation is becoming more widespread. Companies with large numbers of employees and former employees spread around the world can function rather like a corporate diaspora, in short, providing another form of network along which skills and technology can diffuse. The network that has had the greatest impact on spreading ideas, promoting innovation and allowing potential partners to find out about each other's research is, of course, the internet. As access to the internet becomes more widespread, it can allow developing countries to link up more closely with developed countries, as the rise of India's software industry illustrates. But it can also promote links between developing countries.
The Cows to Kilowatts Partnership, based in Nigeria, provides an unusual example. It was founded by Joseph Adelagan, a Nigerian engineer, who was concerned about the impact on local rivers of effluent from the Bodija Market abattoir in Ibadan. As well as the polluting the water supply of several nearby villages, the effluent carried animal diseases that could be passed to humans. Dr Adelagan proposed setting up an effluent-treatment plant.
He discovered, however, that although treating the effluent would reduce water pollution, the process would produce carbon-dioxide and methane emissions that contribute to climate change. So he began to look for ways to capture these gases and make use of them. Researching the subject online, he found that a research institution in Thailand, the Centre for Waste Utilisation and Management at King Mongkut University of Technology Thonburi, had developed anaerobic reactors that could transform agro-industrial waste into biogas. He made contact with the Thai researchers, and together they developed a version of the technology
suitable for use in Nigeria that turns the abattoir waste into clean household cooking gas and organic fertiliser, thus reducing the need for expensive chemical fertiliser. The same approach could be applied across Africa, Dr Adelagan believes. The Cows to Kilowatts project illustrates the global nature of modern innovation, facilitated by the free movement of both ideas and people. Thanks to the internet, people in one part of the world can easily make contact with people trying to solve similar problems elsewhere.
Lessons learned
What policies should governments adopt in order to develop and attract innovation talent, encourage its movement and benefit from its circulation? At the most basic level, investment in education is vital. Perhaps surprisingly, however, Amar Bhidé of Columbia University suggests that promoting innovation does not mean pushing as many students as possible into technical subjects.
Although researchers and technologists provide the raw material for innovation, he points out, a crucial role in orchestrating innovation is also played by entrepreneurs who may not have a technical background. So it is important to promote a mixture of skills. A strong education system also has the potential to attract skilled foreign students, academics and researchers, and gives foreign companies an incentive to establish nearby research and development operations.
Many countries already offer research grants, scholarships and tax benefits to attract talented immigrants. In many cases immigration procedures are "fast tracked" for individuals working in science and technology. But there is still scope to remove barriers to the mobility of talent. Mobility of skilled workers increasingly involves short stays, rather than permanent moves, but this is not yet widely reflected in immigration policy. Removing barriers to short-term stays can increase "brain circulation" and promote diaspora links.
Another problem for many skilled workers is that their qualifications are not always recognised in other countries. Greater harmonisation of standards for qualifications is one way to tackle this problem; some countries also have formal systems to evaluate foreign qualifications and determine their local equivalents. Countries must also provide an open and flexible business environment to ensure that promising innovations can be brought to market. If market access or financial backing are not available, after all, today's global-trotting innovators increasingly have the option of going elsewhere.
The most important point is that the global competition for talent is not a zero-sum game in which some countries win, and others lose. As the Technology Pioneers described here demonstrate, the nature of innovation, and the global movement of talent and ideas, is far more complicated that the simplistic notion of a "talent war" between developed and developing nations would suggest. Innovation is a global activity, and granting the greatest possible freedom to innovators can help to ensure that the ideas they generate will benefit the greatest possible number of people.
Integrated Transformation: How rising customer expectations are turning com...
Modern customers have it good. Spoilt for choice and convenience, today’s empowered consumers have come to expect more from the businesses they interact with. This doesn’t just apply to their wanting a quality product at a fair price, but also tailored goods, swift and effective customer service across different channels, and a connected experience across their online shopping and in-store experience, with easy access to information they need when they want it.
Meeting these expectations is a significant challenge for organisations. For many, it requires restructuring long-standing operating models, re-engineering business processes and adopting a fundamental shift in mindset to put customer experience at the heart of business decision- making. Download our report to learn more.
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About the research
Accelerating urban intelligence: People, business and the cities of tomorrow is an Economist Intelligence Unit report, sponsored by Nutanix. It explores expectations of citizens and businesses for smart-city development in some of the world’s major urban centres. The analysis is based on two parallel surveys conducted in 19 cities: one of 6,746 residents and another of 969 business executives. The cities included are Amsterdam, Copenhagen, Dubai, Frankfurt, Hong Kong, Johannesburg, London, Los Angeles, Mumbai, New York, Paris, Riyadh, San Francisco, São Paulo, Singapore, Stockholm, Sydney, Tokyo and Zurich.
Respondents to the citizen survey were evenly balanced by age (roughly one-third in each of the 18-38, 39-54 and 55 years and older age groups) and gender. A majority (56%) had household incomes above the median level in their city, with 44% below it. Respondents to the business survey were mainly senior executives (65% at C-suite or director level) working in a range of different functions. They work in large, midsize and small firms in over a dozen industries. See the report appendix for full survey results and demographics.
Additional insights were obtained from indepth interviews with city officials, smart-city experts at NGOs and other institutions, and business executives. We would like to thank the following individuals for their time and insights.
Pascual Berrone, academic co-director, Cities in Motion, and professor, strategic management, IESE Business School (Barcelona) Lawrence Boya, director, Smart City Programme, city of Johannesburg Amanda Daflos, chief innovation officer, city of Los Angeles Linda Gerull, chief information officer, city of San Francisco Praveen Pardeshi, municipal commissioner, Brihanmumbai Municipal Corporation (Mumbai) • Brian Roberts, policy analyst, city of San Francisco Sameer Sharma, global general manager, Internet of Things (IoT), Intel • Marius Sylvestersen, programme director, Copenhagen Solutions Lab Tan Kok Yam, deputy secretary of the Smart Nation and Digital Government, Prime Minister’s Office, SingaporeThe report was written by Denis McCauley and edited by Michael Gold.
Talent for innovation
Talent for innovation: Getting noticed in a global market incorporates case studies of the 34 companies selected as Technology Pioneers in biotechnology/health, energy/environmental technology, and information technology.
Leonardo Da Vinci unquestionably had it in the 15th century; so did Thomas Edison in the 19th century. But today, "talent for innovation" means something rather different. Innovation is no longer the work of one individual toiling in a workshop. In today's globalised, interconnected world, innovation is the work of teams, often based in particular innovation hotspots, and often collaborating with partners, suppliers and customers both nearby and in other countries.
Innovation has become a global activity as it has become easier for ideas and talented people to move from one country to another. This has both quickened the pace of technological development and presented many new opportunities, as creative individuals have become increasingly prized and there has been greater recognition of new sources of talent, beyond the traditional innovation hotspots of the developed world.
The result is a global exchange of ideas, and a global market for innovation talent. Along with growth in international trade and foreign direct investment, the mobility of talent is one of the hallmarks of modern globalisation. Talented innovators are regarded by companies, universities and governments as a vital resource, as precious as oil or water. They are sought after for the simple reason that innovation in products and services is generally agreed to be a large component, if not the largest component, in driving economic growth. It should be noted that "innovation" in this context does not simply mean the development of new, cutting-edge technologies by researchers.
It also includes the creative ways in which other people then refine, repackage and combine those technologies and bring them to market. Indeed, in his recent book, "The Venturesome Economy", Amar Bhidé, professor of business at Columbia University, argues that such "orchestration" of innovation can actually be more important in driving economic activity than pure research. "In a world where breakthrough ideas easily cross national borders, the origin of ideas is inconsequential," he writes. Ideas cross borders not just in the form of research papers, e-mails and web pages, but also inside the heads of talented people. This movement of talent is not simply driven by financial incentives. Individuals may also be motivated by a desire for greater academic freedom, better access to research facilities and funding, or the opportunity to work with key researchers in a particular field.
Countries that can attract talented individuals can benefit from more rapid economic growth, closer collaboration with the countries where those individuals originated, and the likelihood that immigrant entrepreneurs will set up new companies and create jobs. Mobility of talent helps to link companies to sources of foreign innovation and research expertise, to the benefit of both. Workers who emigrate to another country may bring valuable knowledge of their home markets with them, which can subsequently help companies in the destination country to enter those markets more easily. Analysis of scientific journals suggests that international co-authorship is increasing, and there is some evidence thatcollaborative work has a greater impact than work carried out in one country. Skilled individuals also act as repositories of knowledge, training the next generation and passing on their accumulated wisdom.
But the picture is complicated by a number of concerns. In developed countries which have historically depended to a large extent on foreign talent (such as the United States), there is anxiety that it is becoming increasingly difficult to attract talent as new opportunities arise elsewhere. Compared with the situation a decade ago, Indian software engineers, for example, may be more inclined to set up a company in India, rather than moving to America to work for a software company there. In developed countries that have not historically relied on foreign talent (such as Germany), meanwhile, the ageing of the population as the birth rate falls and life expectancy increases means there is a need to widen the supply of talent, as skilled workers leave the workforce and young people show less interest than they used to in technical subjects. And in developing countries, where there is a huge supply of new talent (hundreds of thousands of engineers graduate from Indian and Chinese universities every year), the worry is that these graduates have a broad technical grounding but may lack the specialised skills demanded by particular industries.
Other shifts are also under way. The increasing sophistication of emerging economies (notably India and China) is overturning the old model of "create in the West, customise for the East". Indian and Chinese companies are now globally competitive in many industries. And although the mobility of talent is increasing, workers who move to another country are less likely to stay for the long-term, and are more likely to return to their country of origin. The number of Chinese students studying abroad increased from 125,000 in 2002 to 134,000 in 2006, for example, but the proportion who stayed in the country where they studied after graduating fell from 85% to 69% over the same period, according to figures from the OECD (see page 10).
What is clear is that the emergence of a global market for talent means gifted innovators are more likely to be able to succeed, and new and unexpected opportunities are being exploited, as this year's Technology Pioneers demonstrate. They highlight three important aspects of the global market for talent: the benefits of mobility, the significant role of diasporas, and the importance of network effects in catalysing innovation.
Brain drain, or gain?
Perhaps the most familiar aspect of the debate about flows of talent is the widely expressed concern about the "brain drain" from countries that supply talented workers. If a country educates workers at the taxpayers' expense, does it not have a claim on their talent? There are also worries that the loss of skilled workers can hamper institutional development and drive up the cost of technical services. But such concerns must be weighed against the benefits of greater mobility.
There are not always opportunities for skilled individuals in their country of birth. The prospect of emigration can encourage the development of skills by individuals who may not in fact decide to emigrate. Workers who emigrate may send remittances back to their families at home, which can be a significant source of income and can help to alleviate poverty. And skilled workers may return to their home countries after a period working abroad, further stimulating knowledge transfer and improving the prospects for domestic growth, since they will maintain contacts with researchers overseas. As a result, argues a recent report from the OECD, it makes more sense to talk of a complex process of "brain circulation" rather than a one-way "brain drain". The movement of talent is not simply a zero-sum gain in which sending countries lose, and receiving countries benefit. Greater availability and mobility of talent opens up new possibilities and can benefit everyone.
Consider, for example, BioMedica Diagnostics of Windsor, Nova Scotia. The company makes medical diagnostic systems, some of them battery-operated, that can be used to provide health care in remote regions to people who would otherwise lack access to it. It was founded by Abdullah Kirumira, a Ugandan biochemist who moved to Canada in 1990 and became a professor at Acadia University. There he developed a rapid test for HIV in conjunction with one of his students, Hermes Chan (a native of Hong Kong who had moved to Canada to study). According to the United States Centers for Disease Control, around one-third of people tested for HIV do not return to get the result when it takes days or weeks to determine. Dr Kirumira and Dr Chan developed a new test that provides the result in three minutes, so that a diagnosis can be made on the spot. Dr Kirumira is a prolific inventor who went on to found several companies, and has been described as "the pioneer of Nova Scotia's biotechnology sector".
Today BioMedica makes a range of diagnostic products that are portable, affordable and robust, making them ideally suited for use in developing countries. They allow people to be rapidly screened for a range of conditions, including HIV, hepatitis, malaria, rubella, typhoid and cholera. The firm's customers include the World Health Organisation. Providing such tests to patients in the developing world is a personal mission of Dr Kirumira's, but it also makes sound business sense: the market for invitro diagnostics in the developing world is growing by over 25% a year, the company notes, compared with growth of only 5% a year in developed nations.
Moving to Canada gave Dr Kirumira research opportunities and access to venture funding that were not available in Uganda. His innovations now provide an affordable way for hospitals in his native continent of Africa to perform vital tests. A similar example is provided by mPedigree, a start-up that has developed a mobile-phone-based system that allows people to verify the authenticity of medicines. Counterfeit drugs are widespread in the developing world: they are estimated to account for 10-25% of all drugs sold, and over 80% in some countries. The World Health Organisation estimates that a fake vaccine for meningitis, distributed in Niger in 1995, killed over 2,500 people. mPedigree was established by Bright Simons, a Ghanaian social entrepreneur, in conjunction with Ashifi Gogo, a fellow Ghanaian. The two were more than just acquaintances having met at Secondary School. There are many high-tech authentication systems available in the developed world for drug packaging, involving radio-frequency identification (RFID) chips, DNA tags, and so forth.
The mPedigree system developed my Mr Gogo, an engineering student, is much cheaper and simpler and only requires the use of a mobile phone — an item that is now spreading more quickly in Africa than in any other region of the world. Once the drugs have been purchased, a panel on the label is scratched off to reveal a special code. The patient then sends this code, by text message, to a particular number. The code is looked up in a database and a message is sent back specifying whether the drugs are genuine. The system is free to use because the drug companies cover the cost of the text messages. It was launched in Ghana in 2007, and mPedigree's founders hope to extend it to all 48 sub-Saharan African countries within a decade, and to other parts of in the developing world.
The effort is being supported by Ghana's Food and Drug Board, and by local telecoms operators and drug manufacturers. Mr Gogo has now been admitted into a special progamme at Dartmouth College in the United States that develops entrepreneurial skills, in addition to technical skills, in engineers. Like Dr Kirumira, he is benefiting from opportunities that did not exist in his home country, and his country is benefiting too. This case of mPedigree shows that it is wrong to assume that the movement of talent is one-way (from poor to rich countries) and permanent. As it has become easier to travel and communications technology has improved, skilled workers have become more likely to spend brief spells in other countries that provide opportunities, rather than emigrating permanently.
And many entrepreneurs and innovators shuttle between two or more places — between Tel Aviv and Silicon Valley, for example, or Silicon Valley and Hsinchu in Taiwan — in a pattern of "circular" migration, in which it is no longer meaningful to distinguish between "sending" and "receiving" countries.
The benefits of a diaspora
Migration (whether temporary, permanent or circular) to a foreign country can be facilitated by the existence of a diaspora, since it can be easier to adjust to a new culture when you are surrounded by compatriots who have already done so. Some observers worry that diasporas make migration too easy, in the sense that they may encourage a larger number of talented individuals to leave their home country than would otherwise be the case, to the detriment of that country.
But as with the broader debate about migration, this turns out to be only part of the story. Diasporas can have a powerful positive effect in promoting innovation and benefiting the home country. Large American technology firms, for example, have set up research centres in India in part because they have been impressed by the calibre of the migrant Indian engineers they have employed in America. Diasporas also provide a channel for knowledge and skills to pass back to the home country.
James Nakagawa, a Canadian of Japanese origin and the founder of Mobile Healthcare, is a case in point. A third-generation immigrant, he grew up in Canada but decided in 1994 to move to Japan, where he worked for a number of technology firms and set up his own financial-services consultancy. In 2000 he had the idea that led him to found Mobile Healthcare, when a friend was diagnosed with diabetes and lamented that he found it difficult to determine which foods to eat, and which to avoid.
The rapid spread of advanced mobile phones in Japan, a world leader in mobile telecoms, prompted Mr Nakagawa to devise Lifewatcher, Mobile Healthcare's main product. It is a "disease selfmanagement system" used in conjunction with a doctor, based around a secure online database that can be accessed via a mobile phone. Patients record what medicines they are taking and what food they are eating, taking a picture of each meal. A database of common foodstuffs, including menu items from restaurants and fast-food chains, helps users work out what they can safely eat. Patients can also call up their medical records to follow the progress of key health indicators, such as blood sugar, blood pressure, cholesterol levels and calorie intake.
All of this information can also be accessed online by the patient's doctor or nutritionist. The system allows people with diabetes or obesity (both of which are rapidly becoming more prevalent in Japan and elsewhere) to take an active role in managing their conditions. Mr Nakagawa did three months of research in the United States and Canada while developing Lifewatcher, which was created with support from Apple (which helped with hardware and software), the Japanese Red Cross and Japan's Ministry of Health and Welfare (which provided full access to its nutritional database).
Japanese patients who are enrolled in the system have 70% of the cost covered by their health insurance. Mr Nakagawa is now working to introduce Lifewatcher in the United States and Canada, where obesity and diabetes are also becoming more widespread — along advanced mobile phones of the kind once only found in Japan. Mr Nakagawa's ability to move freely between Japanese and North American cultures, combining the telecoms expertise of the former with the entrepreneurial approach of the latter, has resulted in a system that can benefit both.
The story of Calvin Chin, the Chinese-American founder of Qifang, is similar. Mr Chin was born and educated in America, and worked in the financial services and technology industries for several years before moving to China. Expatriate Chinese who return to the country, enticed by opportunities in its fast-growing economy, are known as "returning turtles". Qifang is a "peer to peer" (P2P) lending site that enables students to borrow money to finance their education from other users of the site. P2P lending has been pioneered in other countries by sites such as Zopa and Prosper in other countries.
Such sites require would-be borrowers to provide a range of personal details about themselves to reassure lenders, and perform credit checks on them. Borrowers pay above-market rates, which is what attracts lenders. Qifang adds several twists to this formula. It is concentrating solely on student loans, which means that regulators are more likely to look favourably on the company's unusual business model. It allows payments to be made directly to educational institutions, to make sure the money goes to the right place. Qifang also requires borrowers to give their parents' names when taking out a loan, which increases the social pressure on them not to default, since that would cause the family to lose face.
Mr Chin has thus tuned an existing business model to take account of the cultural and regulatory environment in China, where P2P lending could be particularly attractive, given the relatively undeveloped state of China's financial-services market. In a sense, Qifang is just an updated, online version of the community group-lending schemes that are commonly used to finance education in China. The company's motto is that "everyone should be able to get an education, no matter their financial means".
Just as Mr Chin is trying to use knowledge acquired in the developed world to help people in his mother country of China, Sachin Duggal hopes his company, Nivio, will do something similar for people in India. Mr Duggal was born in Britain and is of Indian extraction. He worked in financial services, including a stint as a technologist at Deutsche Bank, before setting up Nivio, which essentially provides a PC desktop, personalised with a user's software and documents, that can be accessed from any web browser.
This approach makes it possible to centralise the management of PCs in a large company, and is already popular in the business world. But Mr Duggal hopes that it will also make computing more accessible to people who find the prospect of owning and managing their own PCs (and dealing with spam and viruses) too daunting, or simply cannot afford a PC at all. Nivio's software was developed in India, where Mr Duggal teamed up with Iqbal Gandham, the founder of Net4India, one of India's first internet service providers. Mr Duggal believes that the "virtual webtop" model could have great potential in extending access to computers to rural parts of India, and thus spreading the opportunities associated with the country's high-tech boom. A survey of the bosses of Indian software firms clearly shows how diasporas can promote innovation.
It found that those bosses who had lived abroad and returned to India made far more use of diaspora links upon their return than entrepreneurs who had never lived abroad, which gave them access to capital and skills in other countries. Diasporas can, in other words, help to ensure that "brain drain" does indeed turn into "brain gain", provided the government of the country in question puts appropriate policies in place to facilitate the movement of people, technology and capital.
Making the connection
Multinational companies can also play an important role in providing new opportunities for talented individuals, and facilitating the transfer of skills. In recent years many technology companies have set up large operations in India, for example, in order to benefit from the availability of talented engineers and the services provided by local companies. Is this simply exploitation of low-paid workers by Western companies?
The example of JiGrahak Mobility Solutions, a start-up based in Bangalore, illustrates why it is not. The company was founded by Sourabh Jain, an engineering graduate from the Delhi Institute of Technology. After completing his studies he went to work for the Indian research arm of Lucent Technologies, an American telecoms-equipment firm. This gave him a solid grounding in mobile-phone technology, which subsequently enabled him to set up JiGrahak, a company that provides a mobile-commerce service called Ngpay.
In India, where many people first experience the internet on a mobile phone, rather than a PC, and where mobile phones are far more widespread than PCs, there is much potential for phone-based shopping and payment services. Ngpay lets users buy tickets, pay bills and transfer money using their handsets. Such is its popularity that with months of its launch in 2008, Ngpay accounted for 4% of ticket sales at Fame, an Indian cinema chain.
The role of large companies in nurturing talented individuals, who then leave to set up their own companies, is widely understood in Silicon Valley. Start-ups are often founded by alumni from Sun, HP, Oracle and other big names. Rather than worrying that they could be raising their own future competitors, large companies understand that the resulting dynamic, innovative environment benefits everyone, as large firms spawn, compete with and acquire smaller ones.
As large firms establish outposts in developing countries, such catalysis of innovation is becoming more widespread. Companies with large numbers of employees and former employees spread around the world can function rather like a corporate diaspora, in short, providing another form of network along which skills and technology can diffuse. The network that has had the greatest impact on spreading ideas, promoting innovation and allowing potential partners to find out about each other's research is, of course, the internet. As access to the internet becomes more widespread, it can allow developing countries to link up more closely with developed countries, as the rise of India's software industry illustrates. But it can also promote links between developing countries.
The Cows to Kilowatts Partnership, based in Nigeria, provides an unusual example. It was founded by Joseph Adelagan, a Nigerian engineer, who was concerned about the impact on local rivers of effluent from the Bodija Market abattoir in Ibadan. As well as the polluting the water supply of several nearby villages, the effluent carried animal diseases that could be passed to humans. Dr Adelagan proposed setting up an effluent-treatment plant.
He discovered, however, that although treating the effluent would reduce water pollution, the process would produce carbon-dioxide and methane emissions that contribute to climate change. So he began to look for ways to capture these gases and make use of them. Researching the subject online, he found that a research institution in Thailand, the Centre for Waste Utilisation and Management at King Mongkut University of Technology Thonburi, had developed anaerobic reactors that could transform agro-industrial waste into biogas. He made contact with the Thai researchers, and together they developed a version of the technology
suitable for use in Nigeria that turns the abattoir waste into clean household cooking gas and organic fertiliser, thus reducing the need for expensive chemical fertiliser. The same approach could be applied across Africa, Dr Adelagan believes. The Cows to Kilowatts project illustrates the global nature of modern innovation, facilitated by the free movement of both ideas and people. Thanks to the internet, people in one part of the world can easily make contact with people trying to solve similar problems elsewhere.
Lessons learned
What policies should governments adopt in order to develop and attract innovation talent, encourage its movement and benefit from its circulation? At the most basic level, investment in education is vital. Perhaps surprisingly, however, Amar Bhidé of Columbia University suggests that promoting innovation does not mean pushing as many students as possible into technical subjects.
Although researchers and technologists provide the raw material for innovation, he points out, a crucial role in orchestrating innovation is also played by entrepreneurs who may not have a technical background. So it is important to promote a mixture of skills. A strong education system also has the potential to attract skilled foreign students, academics and researchers, and gives foreign companies an incentive to establish nearby research and development operations.
Many countries already offer research grants, scholarships and tax benefits to attract talented immigrants. In many cases immigration procedures are "fast tracked" for individuals working in science and technology. But there is still scope to remove barriers to the mobility of talent. Mobility of skilled workers increasingly involves short stays, rather than permanent moves, but this is not yet widely reflected in immigration policy. Removing barriers to short-term stays can increase "brain circulation" and promote diaspora links.
Another problem for many skilled workers is that their qualifications are not always recognised in other countries. Greater harmonisation of standards for qualifications is one way to tackle this problem; some countries also have formal systems to evaluate foreign qualifications and determine their local equivalents. Countries must also provide an open and flexible business environment to ensure that promising innovations can be brought to market. If market access or financial backing are not available, after all, today's global-trotting innovators increasingly have the option of going elsewhere.
The most important point is that the global competition for talent is not a zero-sum game in which some countries win, and others lose. As the Technology Pioneers described here demonstrate, the nature of innovation, and the global movement of talent and ideas, is far more complicated that the simplistic notion of a "talent war" between developed and developing nations would suggest. Innovation is a global activity, and granting the greatest possible freedom to innovators can help to ensure that the ideas they generate will benefit the greatest possible number of people.
Integrated Transformation: How rising customer expectations are turning com...
Modern customers have it good. Spoilt for choice and convenience, today’s empowered consumers have come to expect more from the businesses they interact with. This doesn’t just apply to their wanting a quality product at a fair price, but also tailored goods, swift and effective customer service across different channels, and a connected experience across their online shopping and in-store experience, with easy access to information they need when they want it.
Meeting these expectations is a significant challenge for organisations. For many, it requires restructuring long-standing operating models, re-engineering business processes and adopting a fundamental shift in mindset to put customer experience at the heart of business decision- making. Download our report to learn more.